If interest rate parity exists, and transaction costs do not exist, the money market hedge will yield the same result as the ____ hedge.
A) put option
B) forward
C) call option
D) none of the above

Question

Quizplus · Accepted Answer

According to interest rate parity, the difference in interest rates between two currencies should equal the difference in the forward exchange rate between those currencies. Therefore, the forward hedge would yield the same result as the money market hedge, assuming no transaction costs. Option hedges (such as put and call options) involve paying a premium, which would not align with the assumption of no transaction costs.

If Interest Rate Parity Exists, and Transaction Costs Do Not