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What principle links the four prices? What is the relevant mathematical formulation?

Category: International Finance Paper Type: Online Exam | Quiz | Test Reference: N/A Words: 200

The relevant mathematical formulation for linking the four prices is the IRP (Interest Rate Parity) theorem:

                          

In the theorem S stand for spot rate, F stand for forward rate, IF stand for the interest rate of foreign currency and ID stand for interest rate of domestic currency.

1.      Identify any arbitrage opportunities and explain how they might have come about.






          

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