Question

QUESTION 9 The differences between purchasing power parity (PPP) and covered interest rate parity (CIRP) include: PPP has less of an fx effect (movement) since it is a one way transaction whereas CIRP involves "round-trip" (forward/futures and spot) market transactions PPP is easier to achieve since it does not rely on future transactions CIRP drives both goods and financial markets closer to parity whereas PPP only affects goods markets CIRP is easier to achieve since it relies on high fungible assets (investments) rather than goods QUESTION 10 Select all of the following that are true regarding hedging: Hedging is unlike arbitrage since arbitrage acts in different markets for the same underlying good whereas hedging acts in markets with inversely correlated markets ideally Buying an insurance policy is an example of hedging Hedging is like arbitrage in that it operates across markets Arbitrage makes hedging more effective by making market prices closer to fundamental value

Answer 1

9.

PPP has less of an fix effect

PPP is easier to achieve since it does not rely on future transactions

Reason: PPP relates to only spot exchange rates while CIRP takes into account spot and futures exchange rates

10.

Buying an insurance policy is an example of hedging

Hedging is like arbitrage in that it operates across markets

Arbitrage makes hedging more effective by making market prices closer to fundamental value

Reason: Hedging is investment decissions made in order to minimize losses