CHAPTER 6 INTERNATIONAL PARITY RELATIONSHIPSSUGGESTED ANSWERS AND SOLUTIONS TO END—OF -CHAPTERQUESTIONS AND PROBLEMSQUESTIONS1。Give a full definitknbictfrageAnswer: Arbitragecan be definedas the act of simultaneouslbuying and sellingthe same orequivalent assets or commodities for the purpose of making certain, guaranteed profits.2.Discuss the implications of the interest rate parity for the exchange。 rate determinationAnswer: Assuming that the forward exchange rate is roughly an unbiased predictor of the futurerate, IRP can be written as:S = [ (1 + )/ (1 +$)I]E[St+1It].The exchange rate is thus determined by the relative ,intaarfesttheraetxpected future spot rateconditional on all the available inf(3jmaatsio(jf tIhe present time. One thus can say that expectationis se—fulfillingSince the information set will be continuously updated as news,hithehe marketexchange rate will exhibit a highly dynamic, random behavior3。Explain the conditions under which the forward exchange rate will be an unbiased predictor cfuture spot exchange °rateAnswer: The forward exchange rate will be an unbiased predictor of the future stpxet niaske ifpremium is insignificant and (ii) foreign exchange markets are informationally efficient.4。Explain the purchasing power parity, both the absolute and reiatWhetvcausensthedeviations from the purchasing power? parityIM-0Answer:The absolute version of purchasing power parity (PPP)S = P/P.The relative version is:e = $ -。PPP can be violateiftherearebarrierso internationaladeor ifpeopleindifferentountriehavedifferent consumption taste. PPP is the law of one price applied to a standard consumption basket.IM-18。 Explain the random walk model for exchange rateforecastinglan itbe consistenWith thetechnical analysis?Answer: The...
