FREE online courses on Investment Decisions in Exchange Rates - Creating a Money Market Hedge

 

 

          The Interest Rate Parity relation can be rearranged to show that

 

                   F$/F        =     S$/F  .

 

The expression above shows that the present value of the proceeds from selling (or cost of buying) currency for dollars in the forward market shown on the left hand side above should equal the current dollar value (at the spot exchange rate) of the present value (discounted at the foreign interest rate) of the amount to be received or paid that is shown on the right hand side.  Therefore, Interest Rate Parity implies that there are two alternative mechanisms for hedging exchange rate risk such as accounts receivable and accounts payable.