Translation exposure-interest rate parity


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.

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Finance Basics: Translation exposure-interest rate parity
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