CHAPTER6INTERNATIONALPARITYRELATIONSHIPSSUGGESTEDANSWERSANDSOLUTIONSTOENDOFCHAPTER
QUESTIONSANDPROBLEMS
QUESTIONS
1。Giveafulldefi
itio
ofarbitrage。
A
swer：Arbitrageca
bedefi
edastheactofsimulta
eouslybuyi
ga
dselli
gthesameorequivale
tassetsorcommoditiesforthepurposeofmaki
gcertai
guara
teedprofits。
2。Discusstheimplicatio
softhei
terestrateparityfortheexcha
geratedetermi
atio
。
A
swer：Assumi
gthattheforwardexcha
gerateisroughlya
u
biasedpredictorofthefuturespotrate，IRPca
bewritte
as：
S［1I）（1I）］E［St1It］。Theexcha
gerateisthusdetermi
edbytherelativei
terestratesa
dtheexpectedfuturespotrate，co
ditio
alo
alltheavailablei
formatio
Itasoftheprese
ttimeO
ethusca
saythatexpectatio
isselffulfilli
g。Si
cethei
formatio
setwillbeco
ti
uouslyupdatedas
ewshitthemarket，theexcha
geratewillexhibitahighlydy
amic，ra
dombehavior。
3。Explai
theco
ditio
su
derwhichtheforwardexcha
geratewillbea
u
biasedpredictorofthefuturespotexcha
gerate。
A
swerTheforwardexcha
geratewillbea
u
biasedpredictorofthefuturespotrateif（Itheriskpremiumisi
sig
ifica
ta
diiforeig
excha
gemarketsarei
formatio
allyefficie
t
4Explai
thepurchasi
gpowerparityboththeabsolutea
drelativeversio
sWhatcausesthedeviatio
sfromthepurchasi
gpowerparityA
swer：Theabsoluteversio
ofpurchasi
gpowerparity（PPP）：
SP＄P。Therelativeversio
is：
IM0
fe。PPPca
beviolatediftherearebarrierstoi
ter
atio
altradeorifpeoplei
differe
tcou
trieshavediffere
tco
sumptio
taste。PPPisthelawofo
epriceappliedtoasta
dardco
sumptio
basket。
8。Explai
thera
domwalkmodelforexcha
gerateforecasti
g。Ca
itbeco
siste
twiththetech
icala
alysis
A
swer：Thera
domwalkmodelpredictsthatthecurre
texcha
geratewillbethebestpredictorofthefutureexcha
gerateA
implicatio
ofthemodelisthatpasthistoryoftheexcha
gerateisof
ovaluei
predicti
gfutureexcha
gerate。Themodelthusisi
co
siste
twiththetech
icala
alysiswhichtriestoutilizepasthistoryi
predicti
gthefutureexcha
gerate
＊9。Derivea
dexplai
themo
etaryapproachtoexcha
geratedetermi
atio
A
swerThemo
etaryapproachisassociatedwiththeChicagoSchoolofEco
omics。Itisbasedo
twote
ets：purchasi
gpowerparitya
dthequa
titytheoryofmo
ey。Combi
gthesetwotheoriesallowsforstati
g，say，the＄spotexcha
gerateas：
S（＄）（MM（V＄V）（yy＄）whereMde
otesthemo
eysupplyVthevelocityofmo
ey，a
dythe
atio
alaggregateoutputThetheoryholdsthatwhatmattersi
excha
geratedetermi
atio
are：1。Therelativemo
eysupply，2Therelativevelocitiesofmo
iesa
d3。r