CFA level 2 · 05. décembre 2022

NO FREE LUNCH The covered interest parity states that the relative value of 2 currencies should be such that borrowing (shorting) in a low yield currency and lending (investing) the proceeds in a higher yield foreign currency while hedging the exchange rate risk using spot and forward exchange risk should earn the domestic risk free rate. In sum, in the context of an hedged exchange rate risk position the investor should be indifferent between investing in both currencies. EXAMPLE Suppose the...