Money-market hedges and forward market hedges rely on the interest rate parity t
ID: 2729823 • Letter: M
Question
Money-market hedges and forward market hedges rely on the
interest rate parity theory.
purchasing power parity theory.
law of large numbers.
capital asset pricing model.
With international investing, unlike domestic investing, exchange rate risk could cause a marginally-positive-NPV project to be rejected due to the additional risk.
true/false
A British-made component costs 45 U.K. pounds. A company in the United States needs to buy these components and the current indirect quote indicates that one dollar will buy .6250 pounds. Ignoring transactions costs, how much will one component cost in U.S. dollars?
$28.13
$45.63
$57.14
$72.00
A foreign currency option differs from a forward exchange contract is all of the following ways except:
it is used to hedge for foreign exchange risk.
it permits delivery of the currency anytime before maturity.
it is traded in standard amounts.
it is traded with standard maturity dates.
a.interest rate parity theory.
b.purchasing power parity theory.
c.law of large numbers.
d.capital asset pricing model.
Explanation / Answer
Correct Answer:
a.
interest rate parity theory
Explanation:
It uses the principles of covered interest rate parity that helps to adjust the differences of interest rate between two countries through forward exchange rates.
a.
interest rate parity theory
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