Forward versus Option Hedge Assume that interest rate parity exists. Today the one-year interest rate in Japan is the same as the one-year interest rate in the United States. You use the international Fisher effect when forecasting how exchange rates will change over the next year. You will receive Japanese yen in one year. You can hedge receivables with a one-year forward contract on Japanese yen or a one-year at-the-money put option contract on Japanese yen. If you use a for ward hedge, will your expected dollar cash flows in one year be higher than, lower than, or the same as if you had used put options? Explain.

FindFind

International Financial Management

14th Edition
Madura
Publisher: Cengage
ISBN: 9780357130698
FindFind

International Financial Management

14th Edition
Madura
Publisher: Cengage
ISBN: 9780357130698

Solutions

Chapter 11, Problem 53QA
Textbook Problem

Forward versus Option Hedge Assume that interest rate parity exists. Today the one-year interest rate in Japan is the same as the one-year interest rate in the United States. You use the international Fisher effect when forecasting how exchange rates will change over the next year. You will receive Japanese yen in one year. You can hedge receivables with a one-year forward contract on Japanese yen or a one-year at-the-money put option contract on Japanese yen. If you use a for ward hedge, will your expected dollar cash flows in one year be higher than, lower than, or the same as if you had used put options? Explain.

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