int't parity conditions 2 (lecture #12)

Question 1

the fisher effect

Answer 1

states that nominal interest rates in each country are equal to the
required real rate of return plus compensation for expected inflation

Question 2

the idea that real interest rates should be equal around the world assumes what?

Answer 2

Assumes frictionless capital mobility

Question 3

the international fisher effect (fisher-open)

Answer 3

states that the spot exchange rate should change in an amount equal to but in the opposite direction of the difference in interest rates between
countries

Question 4

the international fisher effeft predicts that with unrestricted capital flows…

Answer 4

an investor should be indifferent between investing in dollar or
yen bonds, since investors worldwide would see the same opportunity and compete it away

Question 5

what is the impact of the fisher effect?

Answer 5

any difference in nominal rates will be approximately equal to the difference in expected inflation
–ie any time you see a difference in relative interest rates it is due to expected inflation rates

Question 6

If the foreign exchange markets are thought to be “efficient” then the forward rate should be a/an _________ of the future spot rate

Answer 6

unbiased predictor

Question 7

what happens if forward exchange rates and relative interest rates don’t match?

Answer 7

there is an arbitrage opportunity