Bilateral Exchange Rates, A Zero Net Payoff, FX Premia & Trade Profitable on Average - Accounting Assignment Help

Assignment Task

Question 1 

Uncovered interest parity suggests that any gain from interest rate differentials between countries would be eliminated by offsetting movements in bilateral exchange rates. Hence, currency speculators would expect to earn a zero net payoff. Nevertheless, in reality, high interest rate currencies tend to appreciate relative to low interest rate currencies in the short- to medium-term, making carry trade profitable on average. This empirical regularity if often referred to as the “forward premium puzzle”, and is extensively documented in the literature. A plausible risk-based explanation for this anomaly and the consequent payoffs to carry trades is the consideration of a reward for bearing time-varying risk by investors. Discuss the forward premium puzzle and critically evaluate factors that have been included to explain its existence. Can you suggest a new factor that might explain these FX premia better than the factors already explored in the literature?
of the highest distinction.

Question 2
Discuss and evaluate the theoretical arguments in favour of hedging corporate exposure. To what extent have researchers been able to find empirical support for the theories that argue that firms should hedge?

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