International Financial Management
International Financial Management
14th Edition
ISBN: 9780357130698
Author: Madura
Publisher: Cengage
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If US dollars gets lower interest rates in the United States. How would this affect a fundamental forecast of foreign currencies? How would this affect the forward rate forecast of foreign currencies?
Indian interest rates are normally substantially higher than U.S. interest rates. Assuming that interest rate parity exists, do you think hedging with a forward rate will be beneficial if the spot rate of the Indian rupee is expected to decline slightly over time? Will hedging with a money market hedge be beneficial if the spot rate of the Indian rupee is expected to decline slightly over time (assume zero transaction costs)? What are some limitations on using currency futures or options that may make it difficult for you to perfectly hedge against exchange rate risk over the next year or so?
Identify the statement as True, False, or Uncertain, and explain your reasoning: Consider a temporary positive inflation shock in a flexible exchange rate regime (with an inflation targeting central bank) and in a fixed exchange rate regime (where there is no policy intervention). Assume that both economies converge to a medium run equilibrium. Following the shock, inflation converges to its equilibrium value from above in both cases.
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