Parity Conditions in International Finance and Currency Forecasting

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CHAPTER 4 Parity Conditions in International Finance and Currency Forecasting 4.1 A currency is said to be at a forward _________ if the forward rate is below the spot rate. a. discount b. premium c. position d. forward 4.2 The theory of relative purchasing power parity states that, between two nations, the a. inflation rates are unrelated b. exchange rate difference reflects the inflation rate difference c. inflation rate is greater in weaker currencies d. the interest rate is greater than the inflation rate during depreciations 4.3 The Fisher effect states that the _________ rate is made up of a real required rate of return and an inflation premium. a. nominal exchange b. real exchange c. nominal interest rate d. adjusted dividend 4.4 A rise in the inflation rate in one nation relative to others will be associated with a fall in the first nation’s exchange rate and with a rise of its interest rate relative to foreign interest rates. The two conditions combined result in the _________ Effect. a. Fisher b. Herstatt c. Unbiased forward rate d. International Fisher 4.5 The purchase of currency on one market for immediate resale in another market in order to profit from the rate discrepancy is known as _________. a. arbitrage b. financial innovation c. a line of credit d. countertrade 4.6 In its absolute version, _______ states that price levels should be equal world-wide when expressed in a common currency. a. interest rate parity b. purchasing power parity c. the international Fisher effect d. covered interest arbitrage 4.7 When there is a relative shortage of capital and high political risk in most developing countries, it is likely to drive real interest rates in these countries to a. decline below real interest rates in developed countries b. exceed nominal interest rates in developed countries

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