To determine: The reasons that supports that the investors should trade very rarely as per CAPM.
Introduction: CAPM is abbreviated as
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EBK CORPORATE FINANCE
- In the interest parity condition, why does the market exchange rate relate negatively to the interest rate?arrow_forwardAnswer the following: a. Explain why the interest parity condition must hold if the foreign exchange market is in equilibrium. b. Explain why overshooting occurs. What can the Central Bank do to mitigate its effects?arrow_forwardWhich of the following is not an argument for central bank intervention? Exchange rates are highly volatile. Exchange rate fluctuations have an adverse effect on the macroeconomy. The market knows better than economic policy makers what the appropriate level of the exchange rate is. Central bank intervention can smooth out fluctuations in exchange rates.arrow_forward
- Is trading in an OTC market more risky for a trader than trading in an exchange? How so?arrow_forwardIn the interest parity condition, why does the exchange rate relate negatively to the interest rate?arrow_forwardWhich of the following is not an example of sovereign risk? a. Changes in tax rates b. Changes in currency denominations c. Changes in exchange rates d. Changes in regulationsarrow_forward
- Which of the following is the risk due to exchange rates? Business risk Financial risk Market risk Interest rate risk Purchasing power risk Exchange rate riskarrow_forwardWhat are the advantages or the disadvantages of hedging with currency options as opposed to future contracts in international financial transactions?arrow_forwardHow can the company use currency options to hedge against exchange rate risk?arrow_forward
- What is the difference between a currency hedger versus a currency speculatorarrow_forwardWhy do companies with small profit margins have a smaller motivation to hedge against currency movements? Which industries (both specifically and the market form) are these to be most likely to be found it?arrow_forwardQ. If barriers to international securities markets are reduced, will a country’s interest rate be more or less susceptible to foreign lending and borrowing activities? Explain.arrow_forward