Exam - problems - multiple choices Paper - Essay Example

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Summary

Covered interest rate arbitrage cause market realignment in the relationship between the interest rate differential of two currencies and the forward premium on the forward exchange rate between the two currencies.
From the formula, future spot rate= current spot rate…

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Exam - problems - multiple choices Paper

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Subject: Finance & Accounting
Type: Essay
Level: Masters
Pages: 4 (1000 words)
Downloads: 2
Author: bnader

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nominal interest rate implies low expected inflation rate while the Chilean peso will depreciate because of its high nominal interest rate. Its is the IRP that predicts that difference between the forward exchange rate and the spot rates is equal to the difference interest rates available in the two countries. This is because a country with high interest rate will have a forward rate that is discounted. PPP suggests that the spot exchange rate between two currencies should be equal to the ratio of the two countries price levels.

IRP suggests that difference between the forward exchange rate and the spot rates is equal to the difference interest rates available in the two countries. According to IFE interest rate difference between two countries gives an unbiased estimator of the future changes in the spot

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