Question 1 why is the approximate form of the fisher effect, Ask an Expert

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Question: 1. Why is the approximate form of the Fisher Effect frequently used instead of the precise formulation? Does this introduce significant analysis error?

2. Define the international Fisher effect. To what extent do empirical tests confirm that the international Fisher effect exists in practice?

3. Define interest rate parity. What is the relationship between interest rate parity and forward rates?

4. Define the terms covered interest arbitrage and uncovered interest arbitrage. What is the difference between these two transactions?

5. Explain what expectations an investor or speculator would need to under-take an uncovered interest arbitrage investment?

6. If someone you were working with argued that the current forward rate quoted on a currency pair is the market's expectation of where the future spot rate will end up, what would you say?

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