A decision to hedge receivables in the money market will be taken if: A the dome
ID: 2807671 • Letter: A
Question
A decision to hedge receivables in the money market will be taken if: A the domestic interest rate is higher than the foreign interest rate B: C: D: E: 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. 4. 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 0.8467Explanation / Answer
3. A decision to hedge receivables will be taken in the money market when the future expected exchange rate falls. This can be happened when the domestic interest rate is lower than the foreign interest rate. Then, as per the interest parity theory, future expected exchange rate falls and the amount receivable is reduced.
Hence, the correct option is B.
4. Exchange rate at the begining of 2002 = 1.9585 AUD/USD
Inflation rate in Australia = 3.3%
Inflation rate in US = 2.33%
As per PPP theory, exchange rate at the end of 2002 should be
= 1.9585 * (1.033/1.0233)
= 1.9585 * 1.009479
= 1.977065 AUD/USD (or) 0.5058 USD/AUD