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Multinational Finance and investment Q2 c) Illustrate how to synthesize a forward hedging strategy by using only the money markets, in order to hedge against the foreign exchange risk.

Financial Management: Theory & Practice

16th Edition

ISBN:9781337909730

Author:Brigham

Publisher:Brigham

Chapter25: Portfolio Theory And Asset Pricing Models

Section: Chapter Questions

Problem 4P

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Question

Multinational Finance and investment

c) Illustrate how to synthesize a forward hedging strategy by using only the money markets, in order to hedge against the foreign exchange risk.

d) Use a numerical example to illustrate that when there is a large change in the interest rate, the approximation error by using the duration and convexity rule is smaller than the approximation error by using the duration rule only.

Definition Definition Financial market that deals in securities or assets that are short-term in nature. The money market is responsible for keeping up the liquidity of the businesses and the organizations. These securities are usually held for a period of 12 months or less and are issued by institutions that require cash or funds for their short-term cash flow requirements. The money market is regulated by the federal government.

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