Business Administration 4440Q/R/S/T Study Guide - Foreign Exchange Spot, Interest Rate Parity, Nominal Interest Rate
19 Apr 2014
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Questions: give a full definition of arbitrage. Answer: assuming the forward exchange rate is an unbiased predictor of the future spot rate, irp between dollars and pounds can be written as: The exchange rate is thus determined by relative interest rates and the expected future spot rate conditional on available information, it, as of the present time. Since the information set is continuously updated as news hit the market, the exchange rate exhibits a dynamic, random behavior. S = [(1 + i )/(1 + i$)]e[st+1|it]: explain purchasing power parity, both the absolute and relative versions. Ppp can be violated by barriers to trade such as tariffs or transportation costs or cross-country. Ppp is the law of one price applied to a standard consumption basket: discuss the implications of the deviations from purchasing power parity for countries" competitive positions in the world market.
