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3. Forward exchange rates are determined by interest rate differentials -banks try to predict the future interest rates of the two countries in question and set the exchange rate so that no arbitrage opportunity would exist. If the currency sells at a premium in the forward market it doe not necessarily mean that it's going to appreciate and vice versa. Consequently, any risk-averse company should always hedge against the foreign exchange exposure. Hedging though the forward …

…the company would end up paying 2% without having to expose itself to the foreign exchange risk.same as Japanese. If yen depreciates, then Brazilian company has to pay less money, but if it appreciates, then has to pay more money. If borrow in yen, then after a year when we have to pay interest in yen of 2% of the sum, in a year it mightcost more in reals if reals depreciate/yen appreciates. ------------------------------------------------------------------------ **Bibliography**