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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Corporate Finance (4th Edition) (Pearson Series in Finance) - Standalone book
- Exchange rate risk is irrelevant because investors can hedge exchange rate risk on their own. Comment on this preposition.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
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- 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_forwardIn the Mundell-Fleming model with floating, exchange rates, explain what happens to aggregate income, the exchange rate, and the trade balance when the money supply is reduced. What would happen if exchange rates were fixed rather than floating?arrow_forward