International Money and Business summary [Level A+] Questions and Answers 2023

Arbitrage - -The act of simultaneously buying and selling the same or equivalent assets or commodities for the purpose of making certain, guaranteed profits. -Market equilibrium - -Exists when no profitable arbitrage opportunities exist. -Interest rate parity - -An arbitrage condition that must hold when international financial markets are in equilibrium. -Law of one price - -Prevails when the same or equivalent things are trading at the same price across different locations or markets, precluding profitable arbitrage opportunities. -Denomination - -In IRP, hedging the exchange risk by a forward contract. -Covered interest arbitrage - -When IRP doesn't hold; the arbitrager will neither incest any money out of his pocket nor bare any risk. (Borrowing currency at one interest rate and simultaneously lent at another interest rate, with exchange risk fully covered via forward hedging.) -Uncovered interest rate parity - -Often doesn't hold, since exchange rates are volatile. The interest rate differential between a pair of countries is (approximately) equal to the expected rate of change in the exchange rate. -Currency carry trade - -Involves buying a high-yielding currency and funding it with a low-yielding currency, without any hedging. -Purchasing power parity - -The exchange rate between currencies of two countries should be equal to the ratio of the country's price levels.