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Sir its a question 1 in hybrid exam march 2016 part a
It says the model answer that according to PPP the law of one price holds because any weakness in one currency will be compensated by the rate of inflation in the countrys currency.
I don’t get the point here what the author is meant could you help explaining it sir please. Thank youIn the same question sir for part b (ii)
For hedging the model answer is buying call options for weakening euro. Why is he not buying the put options and lock the minimum rate for weakening euro. Is it because the contract currency is dollars ?
Thank you sirPPP says that the exchange rate will change so as to keep the equivalent price the same in the two countries.
I explain and illustrate this in my free Paper F9 lecture on “Forecasting foreign currency exchange rates” (because this is revision of Paper F9).
https://opentuition.com/acca/f9/forecasting-foreign-currency-exchange-rates/
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