fbe436 hw4 solution

To do so att will a b c d e buy more than 80 futures

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Unformatted text preview: n) and wishes to eliminate all risk. To do so AT&T will a. b. c. d. 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 forward rate. () a. because interest rate differentials compensate for the expected depreciation of the FX rate. () 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.

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