Exam 6: International Parity Conditions

Covered interest arbitrage moves the market ________ equilibrium because ________.

The Fisher Effect is a familiar economic theory in the domestic market.In words,define the Fisher Effect and explain why you think it is also appropriately applied to international markets.

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

The relationship between the percentage change in the spot exchange rate over time and the differential between comparable interest rates in different national capital markets is known as:

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

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.

COVERED interest arbitrage (CIA),is where investors borrow in countries and currencies exhibiting relatively low interest rates and convert the proceeds into currencies that offer much higher interest rates.The transaction is "covered," because the investor does not sell the higher yielding currency proceeds forward.

If exchange markets were efficient,the deviation of the actual future quote and today's forward rate will be zero.

If the forward rate is an unbiased predictor of the expected spot rate,which of the following is NOT true?

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.

Consider the price elasticity of demand.If a product has price elasticity less than one it is considered to have relatively elastic demand.

The forward rate is calculated from all the following observable data items EXCEPT:

________ states that nominal interest rates in each country are equal to the required real rate of return plus compensation for expected inflation.

The price of a Big Mac in the U.S.is $3.41 and the price in Mexico is Peso 29.0.What is the implied PPP of the Peso per dollar?

The premium or discount on forward currency exchange rates between any two countries is visually obvious when you plot the interest rates of each country on the same yield curve.The currency of the country with the higher yield curve should be selling at a forward discount.

________ states that the spot exchange rate should change in an equal amount but in the opposite direction to the difference in interest rates between two countries.

The price elasticity of demand for DVD players manufactured by Sony of Japan is greater than one.If the Japanese yen appreciates against the U.S.dollar by 10% and the price of the Sony DVD players in the U.S also rises by 10%,then other things equal,the total dollar sales revenues of Sony DVDs would:

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.

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

Assume the implied PPP rate of exchange of Mexican Pesos per U.S.dollar is 8.50 according to the Big Mac Index.Further,assume the current exchange rate is Peso 10.80/$1.Thus,according to PPP and the Law of One Price,at the current exchange rate the peso is: