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    Parity conditions

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    1) If the forward rate was expected to be an unbiased estimate of the future spot rate, and interest rate parity holds, then:

    a) covered interest arbitrage is feasible.
    b) the international Fisher effect (IFE) is supported.
    c) the international Fisher effect (IFE) is refuted.
    d) the average absolute error from forecasting would equal zero

    2) According to the international Fisher effect, if U.S. investors expect a 5% rate of domestic inflation over one year, and a 2% rate of inflation in European countries that use the euro, and require a 3% real return on investments over one year, the nominal interest rate on one-year U.S. Treasury securities would be:

    a) 2%.
    b) 3%.
    c) -2%.
    d) 5%.
    e) 8%.

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    Solution Preview

    1) If the forward rate was expected to be an unbiased estimate of the future spot rate, and interest rate parity holds, then:

    a) covered interest arbitrage is feasible.
    b) the international Fisher effect (IFE) is ...

    Solution Summary

    Answers to 2 multiple choice questions in International Finance: Parity conditions.

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