Chapter 5 In Class & Reading Notes Flashcards
1
Q
Law of one Price (LOP)
A
Prices in various locations should be similar
2
Q
Purchasing Power parity
A
says Exchange rates should equalize the price of a basket of goods between two countries
3
Q
Two types of purchasing power parity
A
Absolute and Relativity
4
Q
Explain Absolute
A
requires equivalent prices. Law of One Price must hold. Which doesn’t most of the time
5
Q
Explain relative
A
Less strict and more useful. Focus on price changes. Price changes should be harmonized with currency changes to keep things in equilibrium.
6
Q
An arbitrage transaction must satisfy two conditions?
A
- profit must be ensured and there should be no possibility of loss.
- it must be self-financing
7
Q
2 basic forms of arbitrage involving currencies?
A
locational and triangular arbitrage
