Mock Exam #54 If the interest rate parity calculates the one-year forward quote to be 0.0484 GBP / MXN [0.0494 x (1.0535/1.075)] [spot x (1 + interest rate domestic / 1 + interest rate foreign)] and the research dept forecasts the one-year forward rate to be 0.0480 GBP / MXN, do you hedge or do you leave the investment unhedged?

Hedge to get .0480 GBP/MXN.

i think leave unhedged since the market expects a weaker pound…by hedging you’re locking in that weaker pound, when you think it will be stronger …of course, i always get these wrong…anyone else???

I thought if you hedge you are locking in on the forward rate that is calculated by interest rate parity and that is the rate you would want b/c it is greater than the forecast estimated by the research dept.

I think you should hedge, If you had 10000 MXN’s invested after a year if you didn’t hedge you would get 480 pounds, if you hedged you would get 484 pounds. If you wanted to buy MXN’s in a year with pounds then you would hedge.