How the forward exchange rate can be set by speculators

Reference no: EM13897856

1. Why is it true that the hypothesis that the forward exchange rate is an unbiased predictor of the future spot exchange rate is equivalent to the hypothesis that the forward premium (or discount) on a foreign currency is an unbiased predictor of the rate of its appreciation (or depreciation)?

2. It is often claimed that the forward exchange rate is set by arbitrage to satisfy (covered) interest rate parity. Explain how interest rate parity can be satisfied and how the forward exchange rate can be set by speculators in reference to the expected future spot exchange rate.

3. It is sometimes asserted that investors who hedge their foreign currency bond or stock returns re- move the foreign exchange risk associated with the investment, reduce the volatility of their domestic currency returns, and thus get a "free lunch" because the mean return in domestic currency remains the same as the mean return in the foreign currency. Is this true or false? Why?

Reference no: EM13897856

Questions Cloud

What is the spot interest rate in percentage per annum : If the market price of a 20-year pure discount bond with a face value of $1,000 is $214.55, what is the spot interest rate for the 20-year maturity expressed in percentage per annum?

What acceleration is experienced by people remaining at rim : A space station shaped like a giant wheel has a radius of 114m and, when empty, a moment of inertia of 5.84E+8kgm^2. A crew of 163 are living on the rim, and the station's rotation causes the crew to experience an acceleration of 1.00g. 0 When 134..

What are two ways to speculate in the currency markets : What are two ways to speculate in the currency markets without investing any money up front? What do financial economists mean when they discuss the conditional expectation of the future spot exchange rate?

Determine the final angular speed of the system : A solid, horizontal disk of mass 10.9kg and radius 1.20m rotates with an angular speed of 7.87rad/s about a fixed vertical axis through its center. A 0.232kg piece of putty is dropped vertically onto the disk at a point 0.834m from the center of r..

How the forward exchange rate can be set by speculators : Explain how interest rate parity can be satisfied and how the forward exchange rate can be set by speculators in reference to the expected future spot exchange rate.

Understanding and applying the problem solving process : Understanding and Applying the Problem Solving Process

Examples of roman wall painting : Where can examples of Roman wall painting be found today? What was the technique used? What were the materials?

What is the rational expectations hypothesis : What is the rational expectations hypothesis, and how is it applied to tests of hypotheses about expected returns in financial markets?

Analyze these data and interpret your results : Use a two-factor ANOVA to analyze these data and interpret your results. The data are not currently set up correctly for doing a two-factor ANOVA in Excel, so you will likely need to rearrange them

User Account

All Pages