Choose the most appropriate answer: 1. "A clever investor should short overvalued currencies and buy undervalued currencies". a) Violations of Purchasing Power Parity are likely to be corrected eventually, therefore, do it. b) PPP could be violated but uncovered parity could nonetheless hold in the money markets. c) This is not a riskless arbitrage. d) The spread between exchange rates and inflation rates cannot easily be traded in financial markets. 2. "U.S. investors are rational to largely avoid foreign securities because of 'fear of the unknown'". a) Yes, High risk is not appropriate for most investors. b) Yes, imperfect information is broadly similar to a type of barrier to capital flow. c) No, U.S. investors hold huge amounts of foreign stocks and bonds. d) No, they are driven by irrationality. 3. "When a country's stock market is booming, its currency may be overvalued. a) No, the market will only boom if the currency is undervalued and, therefore, competitive. b) No, newly wealthy locals will tend to buy foreign currency to facilitate imports. c) Yes, capital flows may detach a currency's value from PPP computed from product prices. d) Yes, the higher currency lowers the interest rate in the NPV equation. 4. Britain's currency valuation is very uncertain while China's is not. Therefore, a clever investor should sell options on the pound and buy options on the RMB yuan. a) Yes, selling overpriced volatility or buying underpriced volatility is a classic trading strategy. b) Yes, this represents the underlying stability of China's currency and broader economy. c) No, we do not have enough pricing information to decide this question. d) No options exchanges currently trade RMB yuan options