IRP, PPP, and the Hedging Decision
Response to the following problem:
The one year U.S. interest rate is presently higher than the Japanese interest rate. Assume a real rate of interest of 0 percent in each country. Assume that interest rate parity exists. You believe in purchasing power parity (PPP). You have receivables of 10 million Japanese yen that you will definitely receive in one year. Should you hedge? Briefly explain.