To Derive the Theoretical Forward Exchange Rate Using the Arbitrage

question 12

Essay

To derive the theoretical forward exchange rate using the arbitrage argument, we made several assumptions. When the assumptions are violated, the actual forward exchange rate may deviate from the theoretical forward exchange rate. Describe two of these assumptions.

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Definitions:

Interpreted Simultaneously

The process of understanding or clarifying the meaning of information or data at the same time as it is being observed or collected.

Quantitative Data

Data that can be quantified and verified, and is amenable to statistical manipulation.

Qualitative Data

Non-numerical information obtained through methods like interviews, observations, or subjective assessments, focusing on experiences and interpretations.

Face-to-face Interviews

A qualitative research method involving direct, in-person conversation between an interviewer and respondent to gather data.