fin 4180 ch 6

Big Mac

A simple and light-hearted approach to PPP is given by the ______ index.

-The relative velocities of money -The relative money supplies -The relative national outputs

According to the monetary approach, which factors determine exchange rates?

higher

All else equal, an increase in the U.S. interest rate will lead to a(n) ______ foreign exchange value of the dollar

the same as

If the interest rate in two countries is the same, then the forward rate should be ______ the spot rate.

capital

Interest rate parity may not hold because of government ___ controls that can include taxes and restrictions on currency transactions.

1- borrow $S in the US, which is just enough to buy £1 at the prevailing spot exchange rate S. 2- Lend £1 in the UK at the UK interest rate 3- sell the maturity value of the UK investment forward

Order the steps for creating an arbitrage portfolio that has (i) no net investment, as well as (ii) no risk, and that should generate no net cash flow in equilibrium.

purchasing power

The theory that states that the exchange rate between currencies of two countries should be equal to the ratio of the countries' price levels is ___ ___ parity

E(e)

The uncovered interest rate parity equation is (i$ - i£) ≈ ______.

fundamental

Use of the equation s = α + β1(m − m*) + β2(v − v*) + β3( y* − y) + u to forecast interest rates is an example of the ___ approach

-(1 + i$) = FSFS (1 + i£) -S = [1+i£1]/[1+i$] F

What are reasons commonly given for the unfavorable empirical evidence about PPP?

-Transportation costs -Nontradables

What are reasons commonly given for the unfavorable empirical evidence about PPP?

equilibrium

When no profitable arbitrage opportunities exist, the market is said to be in

covered

When the interest rate parity equation does not hold and it is possible to earn profits without exchange-rate risk, there is a(n) ___ interest arbitrage opportunity.

-there is no arbitrage opportunity -the law of one price holds

When the same (or equivalent) things are trading at the same price across different locations or markets, then what is true?

-swiss franc -japenese yen

Which currencies have been popular for funding currency carry trades?

-It may hold even when absolute PPP does not hold. -It is given by the equation e = [π$−π£1] / 1+π£.

Which statements about relative purchasing power are correct?

-There are bid-ask spreads in capital markets. -There are transaction costs in buying and selling currency.

Why might interest rate parity not hold?

short

Covered interest rate arbitrage opportunities are expected to last for a ______ amount of time.

-default -free -risk-free

Calculation of interest rate parity is done using the interest rates of U.S. Treasury notes and their equivalents because they are considered ______

purchasing power

Changes in nominal exchange rates can cause changes in real exchange rates, affecting the international competitive positions of countries, when ___ ___ parity does not hold.

lend; borrow

If (1 + i$) > F/S (1 + i£), then a profitable arbitrage opportunity is to ______ in the United States and ______ in the U.K.

-appreciates; decrease -depreciates; increase

If a country's currency ______ by more than is warranted by PPP, the competitiveness of the country's industries will ______ because the real exchange rate has changed.

technical

If a trader knows that other traders use ___ analysis of historical patterns to forecast exchange rates, it can be rational for that trader to use it, too.

academic studies; traders

Technical analysis tends to be discredited by ________ but supported by ________.

uncovered

That the interest rate differential between a pair of countries is (approximately) equal to the expected rate of change in the exchange rate is known as interest rate parity

the random walk hypothesis

That today's exchange rate is the best predictor of tomorrow's exchange rate is held by ______.

efficient

The ___ market hypothesis is that current asset prices fully reflect all available and relevant information

arbitrage

The act of simultaneously buying and selling the same or equivalent assets or commodities for the purpose of making certain, guaranteed profits is referred to as

long; short; not

The currency carry trade involves being ______ a high-yielding currency, being ______ a low-yielding currency and ______ hedging exchange rate risk.

MV = PY

The equation for the quantity theory of money is ___ ___ ___, where M denotes the money supply, P the general price level, V the velocity of money that measures the speed at which money is being circulated in the economy, and Y the national aggregate output.

MV = PY

The equation for the quantity theory of money is ______, where M denotes the money supply, P the general price level, V the velocity of money that measures the speed at which money is being circulated in the economy, and Y the national aggregate output

-S = [1+i£1+i$]1+i£1+i$ F -(1 + i$) = FSFS (1 + i£)

The interest rate parity condition is given by which formula(s)? Define S and F as the spot and forward rates and i as the interest rate.

discount; deprciate

The interest rate will be higher in the United States than in the U.K. when the dollar is at a forward ______, that is, when the dollar is expected to ______ against the pound.

natural logarithm of domestic/foreign money supply

in s = α + β1(m − m*) + β2(v − v*) + β3( y* − y) + u B1(m-m*) means

natural logarithm of domestic/foreign velocity of money

in s = α + β1(m − m*) + β2(v − v*) + β3( y* − y) + u B2(v-v*) means

natural logarithm of foreign/domestic output

in s = α + β1(m − m*) + β2(v − v*) + β3( y* − y) + u B3(y*-y) means

natural logarithm of the spot exchange

in s = α + β1(m − m*) + β2(v − v*) + β3( y* − y) + u s means

random error term with mean zero

in s = α + β1(m − m*) + β2(v − v*) + β3( y* − y) + u u means