ment will reduce the interest to attract the investors to invest into corporate companies again. According to CIP, if the interest rate is going down, the exchange rate will appreciate quickly. The percentage of appreciation in exchange rate will be as the same as the percentage of increase in interest rate. If the percentage of increase in interest rate is large, the percentage of appreciation in exchange rate will large as well. Thus, if the importers do not hedge themselves, they will lose much money in this circumstance.Government InterventionIf the government wants to intervene the exchange rate, it can still use the monetary policy. However, most of the free-market countries do not intervene the exchange rate. Most of other countries that do intervene the exchange rate have fixed exchange rates, target zones, or managed floats. If a country has a fixed exchange rate, companies within that country do not need to worry about the hedging of exchange rate. However, one thing needs to worry about is that the government is trying to float the exchange rate. If the government realise the limitation, the exchange rate may go down sharply. It is because the government always sets its fixed exchange rate at a greater dollar value in order to import goods cheaper. Target zone is that there are upper and lower limits. For example, there are 5% limits and the exchange rate is equal to 2. Thus, the upper limit is 2.1 and the lower limit is 1.9. If one day the exchange is reached 2.1, the government will start to intervene and depreciate the exchange rate and vice versa. In this case, the companies may not need to hedge themselves that depends how large the target zone is. The managed float is that there is not formal exchange rate target, the government will only intervene when the exchange depreciates or appreciates too much in a short period. The companies in that country may need to hedge themsel...
