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International Finance questions (definitions of theories, Ms. Rosetta Stone, silk scarf importer and more...)

1. Define each of the following theories in a sentence or simple equation:
a. Interest-rate parity theory
b. Expectations theory of forward rates
c. Law of one price

2. Ms. Rosetta Stone, the treasurer of International Reprints, Inc., has noticed that the interest rate in Switzerland is below the rates in most other countries. She is, therefore, suggesting that the company should make an issue of Swiss franc bonds. What considerations ought she first to take into account?

3. An importer in the United States is due to take delivery of silk scarves from Italy in 6 months. The price is fixed in lire. Which of the following transactions could eliminate the importer's exchange risk?
a. Sell 6-month call options on lire
b. Buy lire forward
c. Sell lire forward
d. Sell lire in currency futures market
e. Borrow lire; buy dollars at the spot exchange rate
f. Sell lire at the spot exchange rate; lend dollars

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International Finance

1. Define each of the following theories in a sentence or simple equation:
a. Interest-rate parity theory
According to interest rate parity theory, the difference in interest rates must equal the difference between the future and current exchange rates.
F0=Forward Price (expressed as Pound per $)
E0=Current Rate
Risk free rate in foreign country = ruk
Risk free rate in domestic country = rus
F0 = E0*(1+r)/(1+rd)

b. Expectations theory of forward rates
According to expectation hypothesis, the Forward price equals the expected value of the future spot price of the asset
F0=E(PT)
Under this ...

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