If UIP holds then:
A) foreign interest rates will equal domestic interest rates so hedging is unnecessary
B) the spot exchange rate will not change so hedging is unnecessary
C) the forward rate will equal the spot rate at maturity of the forward contract so hedging is unnecessary
D) the foreign currency return will equal the domestic currency return and any change in the spot rate . will be offset by change in the interest rate differential so hedging is unnecessary

Question

Quizplus · Accepted Answer

The Uncovered Interest Parity (UIP) theory posits that the difference in interest rates between two countries will equal the expected change in exchange rates between the countries' currencies. Therefore, if UIP holds, any potential gains from currency exchange rate fluctuations would be offset by interest rate differentials, making currency hedging unnecessary.

If UIP Holds Then