Question: questions QUESTION ONE (a) What are the fundamental differences between the theories of purchasing power parity and the interest rate parity. (8 Marks) (b)

questions QUESTION ONE (a) What are the fundamental differences between the theories

questions QUESTION ONE (a) What are the fundamental differences between the theories of purchasing power parity and the interest rate parity. (8 Marks) (b) A bank in the USA can attract 3 months deposits by paying interest at 6%. It has to pay deposit insurance premium of 0.05% and the federal reserve requirement against the deposit would be 5%. Required: Determine the effective deposit cost on the funds. (4 Marks) (c) These financial instruments: forwards, swaps and options, are used to hedge against the exchange rate risk. Explain what these instruments entail. (12 Marks) (d) Write short notes on the following concepts of international trade; (i) Comparative advantage Absolute advantage (3 Marks) (3 Marks)

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a The theory of purchasing power parity PPP states that exchange rates between currencies should adjust to reflect differences in the price levels of goods and services between countries PPP suggests ... View full answer

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