Problem 1: Exchange Rate Relationships. 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.
d. International Fisher effect
Problem 2: Heading Exchange Rate Risk. An importer in the United States is due to take delivery of silk scarves from Europe in 6 months. The price is fixed in euros. Which of the following transactions could eliminate the importer's exchange risk?
a. Buy euros forward.
b. Sell euros forward.
c. Borrow euros, buy dollars at the spot exchange rate.
d. Sell euros at the spot exchange rate, lend dollars.