1. Explain the overshooting model of exchange rate determination. Contrast it with the monetarist model. Explain addtionally Jacob Frankel's real interest rate modification of the overshooting model.
2. Derive the Fisher effect expression by explaining its logic. And explain real interest rate parity.
3. What are the two (necessary and sufficient) conditions for the forward rate unbiased condition under imperfect capital market condition to hold?
If either of these assumptions (or conditions) fails the forward rate will be a biased predictor of future sport exchange rate. Interpret a forward rate bias by failure of either of the two assumptions.
4. Explain the portfolio balance approach to exchange rate determination. In preferred local habitat model of the portfolio balance approach how would the current account deficit affect the exchange rate? Why?
5. Introduce some evidences on IRP when forward contracts or rate of return to securities used for empirical tests are long-term in maturities.
6. When the capital market is not perfect so that there are transaction costs such as arbitrage transaction costs, differential tax rates on income and capital gains, and the existence of default risk and/or country risk, how would the interest rate parity condition be affected?