INTERNATIONAL PARITY RELATIONSHIPS AND FORECASTING FOREIGN EXCHANGE RATES 1

1. Give a full definition of arbitrage.

2. Discuss the implications of the interest rate parity for the exchange rate determination.

3. Explain the conditions under which the forward exchange rate will be an unbiased predictor of the future spot exchange rate.

4. Explain the purchasing power parity, both the absolute and relative versions. What causes   the deviations from the purchasing power parity?

5. Discuss the implications of the deviations from the purchasing power parity for countries’ competitive positions in the world market.

6. Explain and derive the international Fisher effect.

7. Researchers found that it is very difficult to forecast the future exchange rates more accurately than the forward exchange rate or the current spot exchange rate. How would you interpret this finding

8. Explain the random walk model for exchange rate forecasting. Can it be consistent with the technical analysis?

*9. Derive and explain the monetary approach to exchange rate determination.

10. Explain the following three concepts of purchasing power parity (PPP):

1. The law of one price. b. Absolute PPP.
2. Relative PPP.

11.  Evaluate the usefulness of relative PPP in predicting movements in foreign exchange rates on:

1. Short-term basis (for example, three months)

1. b. Long-term basis (for example, six years)