1. Describe Interest Rate Parity (IRP). 2. Compare and contrast forward and futu

Question

1. Describe Interest Rate Parity (IRP).

2. Compare and contrast forward and futures contracts.

3. Explain how firms can benefit from forecasting exchanges rates.

4. Describe the common techniques used for forecasting exchange rates.

5. Explain the concepts of transaction exposure, economic exposure, and translation exposure. How each of the exposure could be measured?

6. Describe the commonly used techniques to hedge payables and receivables.

7. Suggest other methods of reducing exchange rate risk when hedging techniques are not available.

8. Explain how a firm can hedge its translation exposure and the limitations of hedging translation exposure.

Explanation / Answer

1) Interest Rate Perity: Interest rate perity is a no arbritage condition representing an equilibrium state in which inesters will be indifferent to interest rates available on bank deposits in two countries.There are two basic assumption behind Interest rate perity (a) Capital mobility and (b) perfect substitutablity of domestic and foreighn assets. Under this Interest rate differential between the two countries equals to the differential between the forward exchange rates and spot exchange rtaes.

2)Following are some points to highlight the main difference between the forward and future contracts:

3) Following are some points describing how fimrs can be benifited by forcasting exchange rates:

4) Common techniques used for forcasing exchange rates:

(a) technical forcasting

(b) fundamental forcasting

(c) market based forcasting

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