Exam 7: International Parity Conditions

The theory of ________ states that the difference in the national interest rates for securities of similar risk and maturity should be equal to but opposite in sign to the forward rate discount or premium for the foreign currency,except for transaction costs.

The final component of the equation for the Fisher Effect,(r)(π),where r = the real rate of return and π = the expected rate of inflation,is often dropped from the equation because the number is simply too large for most Western economies.

The government just released international exchange rate statistics and reported that the real effective exchange rate index for the U.S.dollar vs the Japanese yen decreased from 105 last year to 95 currently and is expected to fall still further in the coming year.Other things equal U.S.________ to/from Japan think this is good news and U.S.________ to/from Japan think this is bad news.

When the spot and forward exchange markets are not in equilibrium as described by interest rate parity,the potential for "riskless" arbitrage profit exists.This is called ________.

All that is required for a covered interest arbitrage profit is for interest rate parity to not hold.

If a market basket of goods cost $100 is the US and 70 euros in France,then the PPP exchange rate would be $.70/euro.

If a country's real effective exchange rate index were to be less than 100,this would suggest an ________ currency.

Empirical studies show that the Fisher Effect works best for short-term securities.

According to the international Fisher Effect,if an investor purchases a five-year U.S.bond that has an annual interest rate of 5% rather than a comparable British bond that has an annual interest rate of 6%,then the investor must be expecting the ________ to ________ at a rate of at least 1% per year over the next 5 years.

A ________ is an exchange rate quoted today for settlement at some time in the future.

Both covered and uncovered interest arbitrage are risky operations in the sense that even without default in the securities,the returns are unknown until all transactions are complete.

According to the Big Mac Index,the implied PPP exchange rate is Mexican Peso 8.58/$1 but the actual exchange rate is Peso 11.80/$1.Thus,at current exchange rates the peso appears to be ________ by ________.

If the current exchange rate is 113 Japanese yen per U.S.dollar,the price of a Big Mac hamburger in the United States is $3.41,and the price of a Big Mac hamburger in Japan is 280 yen,then other things equal,the Big Mac hamburger in Japan is ________.

Empirical tests have yielded ________ evidence about market efficiency with a general consensus that developing foreign markets are ________.

The authors describe an application of uncovered interest arbitrage (UIA)known as "yen carry trade." Define UIA and describe the example of yen carry trade.Why would an investor engage in the practice of yen carry trade and is there any risk of loss or lesser profit from this investment strategy?

The current U.S.dollar-yen spot rate is 85¥/$.If the 90-day forward exchange rate is 88 ¥/$ then the yen is at a forward premium.