Question 1: A perfect hedge (full coverage) on translation exposure can usually be achieved when:
- using the money market hedge.
- using the forward hedge.
- using the futures hedge.
- none of the above, since a perfect hedge is nearly impossible.
Question 2: Assume that the U.S. interest rate is 10%, while the British interest rate is 15%. If interest rate parity exists, then:
- British investors who invest in the United Kingdom will achieve the same return as U.S. investors who invest in the U.S.
- U.S. investors will earn a higher rate of return when using covered interest arbitrage than what they would earn in the U.S.
- U.S. investors will earn 15% whether they use covered interest arbitrage or invest in the U.S.
- U.S. investors will earn 10% whether they use covered interest arbitrage or invest in the U.S.