Interest-rate parity theory

Question 1. Define each of the following theories in a sentence or simple equation:

a. Interest-rate parity theory

b. Expectations theory of forward rates

c. Law of one price

Question 2.  Ms. Rosetta Stone, the treasurer of International Reprints, Inc., has noticed that the interest rate in Switzerland is below the rates in most other countries. She is, therefore, suggesting that the company should make an issue of Swiss franc bonds. What considerations ought she first to take into account?

Question 3.  An importer in the United States is due to take delivery of silk scarves from Italy in 6 months. The price is fixed in lire. Which of the following transactions could eliminate the importer's exchange risk?

a. Sell 6-month call options on lire

b. Buy lire forward

c.  Sell lire forward

d. Sell lire in currency futures market

e. Borrow lire; buy dollars at the spot exchange rate

f.  Sell lire at the spot exchange rate; lend dollars

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Finance Basics: Interest-rate parity theory
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