ch12 - Chapter 12 Exchange Rates, Interest Rates, and...

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Chapter 12 Exchange Rates, Interest Rates, and Interest Parity 1. Arbitrage and Interest Rates Understand riskless interest arbitrage using the spot and forward contract. No arbitrage condition: covered interest parity (CIP). Understand risky interest arbitrage using only spot contracts. No arbitrage condition: uncovered interest parity (UIP). Understand and apply UIP approximation. 2. Exchange Rates and Interest Rates in the Short Run: UIP and Foreign Exchange (FX) Market Equilibrium Equilibrium in the FX Market: An Example Adjustment to FX Market Equilibrium Changes in Domestic and Foreign Returns and FX Market Equilibrium Summary 3. Carry trade Overview of the two kinds of arbitrage Exchange rate risk refers to changes in the value of an asset due to a change in the exchange rate. Riskless arbitrage Investor covers the risk of the exchange rate changing in the future by using a forward contract. No exchange rate risk because there is no chance the exchange rate on the
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ch12 - Chapter 12 Exchange Rates, Interest Rates, and...

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