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Unformatted text preview: ANSWER: Yes. The expected future spot rate derived from the IFE theory is the same as the forward rate. Thus, the results from selling pounds at the future spot rate (when not hedging) should be equal to the results from selling the pounds forward (when hedging) on average if the IFE theory holds. 2. If you were in Jim's position, would you spend time trying to decide whether to hedge the receivables each month, or do you believe that the results would be the same (on average) whether you hedged or not? ANSWER: There is some question as to whether the IFE theory holds. Therefore, it is naive to think that the results will be the same on average whether one hedges or does not hedge. However, it is possible that one could do worse by making the hedge vs. no-hedge decision each month, but most managers would attempt to make the decision rather than ignore it....
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This note was uploaded on 02/14/2011 for the course FINANCE 640 taught by Professor Sen during the Fall '10 term at UMBC.
- Fall '10