Question: Now, Mr. Logan is questioning whether this process is worth the trouble. He suggests that if the international Fisher effect (IFE) holds, the pounds value

Now, Mr. Logan is questioning whether this process is worth the trouble. He suggests that if the international Fisher effect (IFE) holds, the pounds value should change (on average) by an amount that reflects the differential between the interest rates of the two countries of concern. Because the forward premium reflects the same interest rate differential, the results from hedging should equal the results from not hedging on average.

1. Is Logans interpretation of the IFE theory correct? Why?

2. If you were in Logans 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 hedge or not?

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