Question

a. Assuming that interest rate parity exists, do you think hedging with a forward rate would...

a. Assuming that interest rate parity exists, do you think hedging with a forward rate would be beneficial if the spot rate of the Mexican peso was expected to decline slightly over time?

Homework Answers

Answer #1

Yes, because if you hedge with a forward rate you may benefit as it is always beneficial to invest at higher interest rates in order to gain more profit. Also, lower interest rates are not attractive and thus reduces the value of the currency. As mentioned, if spot rates are expected to decline, it would be better to opt for forward rate.

Forward rate is a rate at which transaction would be carried out on a future date.

Spot rate is a rate which is determined on the spot date and carried out in two working days usually.

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