1) Explain what is meant by "foreign exchange risk" and what the roles of spot, forward, futures, and options markets are in hedging against this foreign exchange risk.
2) It is a fact that real and nominal exchange rates move together very closely in the short run. What does this suggest about aggregate price-levels and purchasing power parity?
3) Use the definition of the "real" exchange rate to explain how nominal exchange rates can deviate from absolute purchasing power parity even in the long run.
4) Using the "AA" and "DD" model from the course text illustrate the effects on exchange rates and aggregate output of a permanent increase of investment spending.