(UIP) You are in discussion with a forex trader.
a. She reveals that she made a 10% annual rate of return last year. Based on these data, can we say that the forex market in question violates the efficient markets hypothesis (EMH)?
b. The trader reveals that she can make predictable 10% annual rates of return on forex trades for a pair of currencies, with a standard deviation of 25%, and has been doing so for a long time. Calculate the Sharpe ratio for these trades. Based on these data, does the forex market in question satisfy the EMH?
c. Can the trader’s predictable profits be explained by trading frictions? By risk aversion?