Define and give an example of relative purchasing power parity

1. Define and give an example of relative purchasing power parity.

Relative purchasing power parity explains the association between the two country’s inflation rates in specific period of time. The formula of relative purchasing power parity is:

1. Are implied forward rates good predictors of future spot rates? Explain.

The implied rate is the difference of interest rate for forward and the spot interest rate. The studies have shown that spot rate are a better predictor of future spot rate rather than forward rates.

1. Define and give an example of reciprocal arbitrage.

Reciprocal arbitrage is about purchasing security in one market and selling in another market in higher price. For example an investor purchases a security from foreign exchange and then sell it to another market on profit.

1. What is uncovered interest parity used for?

Uncovered interest rate parity explains that the difference between two county’s interest rates will equalize the exchange rate in the same period. It is the form of IRP and used with covered interest parity.

1. What is the most important difference between an FX forward and futures contract?

Future contracts are standardized whereas forward contracts are negotiated privately and that is one of the most important difference between FX forward & future contracts.

1. What are American quotes? Give an example.

American currency quotation is used as per unit measure for evaluating the foreign currency. In short it is the direct quotation in different exchange markets around the world.

1. Explain what is meant by a money market hedge

It is technique used for hedging the foreign exchange risk by using the money markets.

1. Define synthetic debt and give an example

Synthetic debt is the debt obligation for the individual who have invested in the CDSs (Credit Default Swaps)

1. What is the difference between FX risk and exposure?

The foreign exchange risk is the risk of changes in value of currency. There are many types of foreign exchange risk exposures such as economic exposure.

1. Define and give an example of translation exposure.

The transaction exposure occurs when the payment is dominated in foreign currency.