What is a money market hedge and how is it constructed

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1. Describe the sequence of transactions required to do a covered interest arbitrage out of Japanese yen and into U.S. dollars.

2. Suppose you saw a set of quoted prices from a U.S. bank and a French bank such that you could borrow dollars, sell the dollars in the spot foreign exchange market for euros, deposit the euros for 90 days, and make a forward contract to sell euros for dollars and make a guaranteed profit. Would this be an arbi- trage opportunity? Why or why not?

3. The interest rates on U.S. dollar-denominated bank accounts in Mexican banks are often higher than the interest rates on bank accounts in the United States. Can you explain this phenomenon?

4. What is a money market hedge? How is it constructed?

5. Suppose you are the French representative of a company selling soap in Canada. Describe your foreign exchange risk and how you might hedge it with a money market hedge.

Reference no: EM13897874

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