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Unformatted text preview: n) and wishes to eliminate all
risk. To do so AT&T will
e. buy more than 80 futures contracts.
buy 80 futures contracts.
buy less than 80 futures contracts.
sell 80 futures contracts.
none of the above. 4.9
Assets bearing fixed interest are not subject to FX risk if uncovered IRPT holds. Note:
“UIRPT holds” means that the actual FX rate varies randomly around the value predicted by the
a. because interest rate differentials compensate for the expected depreciation of the FX
b. since the forward contract part of IRPT automatically hedges the FX exposure.
c. because in this case the cost of forward cover is zero.
d. only if the home and foreign interest rates are equal.
e. none of the above.
Answer is (e). The answer is not (a) because while UIRPT may holds on average, it will not
hold exactly over every time interval. Thus, there is still FX risk for each asset individually. If
the question read “…UIRPT holds in the short run…” then the correct answer would b...
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This note was uploaded on 01/16/2010 for the course FBE 436 at USC.