What's wrong with the following statements? (a) The forward is the expected future spot rate. (b) The
Question:
What's wrong with the following statements?
(a) The forward is the expected future spot rate.
(b) The sign of the forward premium tells you nothing about the strength of a currency; it just reflects the difference of the interest rates.
(c) The difference of the interest rates tells you nothing about the strength of a currency; it just reflects the forward premium or discount.
(d) The forward rate is a risk-adjusted expectation but the spot rate is independent of expectations
(e) A certainty equivalent tends to be above the risk-adjusted expectation because of the risk correction.
(f) A risk-adjusted expectation is always below the true expectation because we don't like risk.
(g) A risk-adjusted expectation can be close to, or above the true expectation. In that case the whole world would hold very little of that currency, or would even short it.
(h) Adding a zero-value contract cannot change the value of the firm; therefore a forward hedge cannot make the shareholders better off.
Step by Step Answer:
International Finance Putting Theory Into Practice
ISBN: 978-0691136677
1st edition
Authors: Piet Sercu