What condition is necessary to create a synthetic forward contract?
A)A hedging position.
B)Exposure to changes in exchange rates
C)Interest rate parity
D)Speculating in the market

Question

Quizplus · Accepted Answer

Interest rate parity is necessary to create a synthetic forward contract because it ensures that the cost of hedging exchange rate risk through a forward contract is equivalent to the cost of borrowing and lending in the domestic and foreign currencies. This parity condition allows for the creation of a synthetic forward position by combining lending or borrowing in the two currencies.

What Condition Is Necessary to Create a Synthetic Forward Contract