Case: Integrating Interest rate parity (IRP) and purchasing power parity (PPP).
Assume that interest rate
parity exists. Assume that you have payables in Argentine Pesos. You have noticed that historically the forward rate of the Argentine peso quoted by the banks exhibits a large discount. Write a short essay on the likely reason why the peso exhibits a discount overtime. Does the discount mean that the forward rate is underpriced (that the banks should quote a higher forward price). Do you think that you may be more likely to hedge your payables when the Argentine peso exhibits a more pronounced discount? Explain.
Textbook: International Financial Management (13 edition) pg-283 By Jeff Madura
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