Q1. Assume the unit cost for pogo sticks is #40 in North Pogo as well as $8 in South Pogo, while the current exchange rate is $1=#4. Clarify how the current exchange rate between # as well as $ will get adjusted by market forces through the Law of One Cost. What will be the adjusted exchange rate between the two currencies?
Q2. Would a typical hedger be willing to pay a risk premium in order to hedge by buying foreign currency forward?