3. A decision to hedge receivables in the money market will be taken if: A: B: C

Question

3. A decision to hedge receivables in the money market will be taken if: A: B: C: D: E: the domestic interest rate is higher than the foreign interest rate. the domestic interest rate is lower than the foreign interest rate. the interest parity forward rate is higher than the expected spot rate. the interest parity forward rate is lower than the expected spot rate. the interest parity forward rate is equal to the expected spot rate. At the beginning of 2002 the AUD/USD exchange rate was 1.9585 and the 2002 inflation rates were 3.30% for Australia and 2.33% for the US, what should the AUD/USD exchange rate have been at the end of 2002, according to the approximate calculation of Relative PPP theory? A: USD/AUD 0.5068 B: AUD/USD 1.9736 C: AUD/USD 1.9775 D: USD/AUD 1.8769 E USD/AUD 0.8467 4. 4

Explanation / Answer

3) Answer: Option [C]. The money market hedge will ensure that the final exchange is at the rate as per the Interest rate parity theory. Hence, only if the rate as per the IRPT is more than the expected exchange rate, will the MM hedge be chosen. 4) 1.9585*[1+(rAUD-rUSD) = 1.9585*[1+(0.033-0.0233)=1.9585*1.0067 = $      1.9775 Answer: Option [C].

Related Questions

Navigate

• Browse (All)
• Browse 3
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.