Exam 6: International Parity Conditions

If we set the real effective exchange rate index between the United Kingdom and the United States equal to 100 in 2005, and find that the U.S. dollar has changed to a value of 91.4, then from a competitive perspective the U.S. dollar is ________.

A country's currency that strengthened relative to another country's currency by more than that justified by the differential in inflation is said to be ________ in terms of PPP.

According to the theory of interest rate parity, the difference in national interest rates for securities of similar risk and maturity should be ________ and ________ sign to the forward rate discount or premium for the foreign currency, except for transaction costs.

From the viewpoint of a U.S. investor or trader, the indirect quote for a currency exchange rate would be quoted in ________.

Empirical tests prove that PPP is an accurate predictor of future exchange rates.

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

The assumptions for relative PPP are more rigid than the assumptions for absolute PPP.

If according to the law of one price the current exchange rate of dollars per British pound is $1.75/£, then at an exchange rate of $1.85/£, the dollar is ________.

If the identical product can be sold in two different markets, and there are no restrictions on its sale or transportation costs of moving the product between markets, the product's price should be the same in both markets. This is called ________.

One year ago the spot rate of U.S. dollars for Canadian dollars was $1/C$1. Since that time the rate of inflation in the U.S. has been 4% greater than that in Canada. Based on the theory of Relative PPP, the current spot exchange rate of U.S. dollars for Canadian dollars should be approximately ________.

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 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.

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

Jennifer is considering a covered interest arbitrage investment in UK pounds. The current exchange rate is £0.50/$ and the six-month forward rate is £0.49/$. If the annual rate on riskless securities in the US is 3% then Jennifer will make a greater profit via CIA compared to the US investment.

The implied PPP rate of exchange of Mexican Pesos per U.S. dollar is 8.50 according to the Big Mac Index. The current exchange rate is Peso 10.8/$1. Thus, according to PPP and the Law of One Price, at the current exchange rate the peso is ________.

If we set the real effective exchange rate index between Canada and the United States equal to 100 in 1998, and find that the U.S. dollar has risen to a value of 112.6, then from a competitive perspective the U.S. dollar is

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

Use interest rate parity to answer this question. A U.S. investor has a choice between a risk-free one-year U.S. security with an annual return of 4%, and a comparable British security with a return of 5%. If the spot rate is $1.43/£, the forward rate is $1.44/£, and there are no transaction costs, the investor should invest in the U.S. security.

If exchange markets were not efficient, it would pay for a firm to spend resources on forecasting exchange rates.

Exchange rate pass-through may be defined as