Similar trades using risky foreign currency bonds or even foreign stock may be made, but the hedging trades may actually add risk to the transaction, e.g. if the bond defaults the investor may lose on both the bond and the forward contract.
In this example the investor is based in the United States and assumes the following prices and rates: spot USD/EUR = $1.2000, forward USD/EUR for 1 year delivery = $1.2300, dollar interest rate = 4.0%, euro interest rate = 2.5%.
An Empirical Test of the Interest Rate Parity: Does It Hold between U.S.A and Selected Emerging Asian Economies?
Jul 01, 2010; INTRODUCTION The theory of Interest Rate Parity (IRP) holds that one cannot make arbitrage profits due to different interest...
An Empirical Test of the Interest Rate Parity: Does It Hold between U.S.A. and Selected Emerging Asian Economies?
Jul 01, 2010; ABSTRACT Interest Rate Parity is a theory that exchange rates are determined between two currencies based on the interest rate...