For a US firm to hedge a €1,250,000 receivable (or payable) in one year, which of the two strategies (forward hedge vs money-market hedge) is better when interest rate parity relationship does not hold?
Attempt 1/2 for 10 pts.
Part 1
If S(1+i$) < F(1+i€), and if the US firm is to hedge a €1,250,000 payable
the two strategies work equally well
forward hedge is better
depends on the future spot exchange rate in one year
depends on the forward contract size
money-market hedge is better
Submit
Attempt 1/2 for 10 pts.
Part 2
If S(1+i$) > F(1+i€), and if the US firm is to hedge a €1,250,000 receivable
forward hedge is better
the two strategies work equally well
depends on the forward contract size
money-market hedge is better
depends on the future spot exchange rate in one year
Submit
Attempt 1/2 for 10 pts.
Part 3
If S(1+i$) > F(1+i€), and if the US firm is to hedge a €1,250,000 payable
depends on the future spot exchange rate in one year
money-market hedge is better
the two strategies work equally well
depends on the forward contract size
forward hedge is better
Submit
Attempt 1/2 for 10 pts.
Part 4
If S(1+i$) < F(1+i€), and if the US firm is to hedge a €1,250,000 receivable
the two strategies work equally well
forward hedge is better
depends on the future spot exchange rate in one year
depends on the forward contract size
money-market hedge is better
Submit
