Testing IRP, PPP, and IFE

Using the last five years (60 data points), examine whether IRP, PPP, IFE holds. Present your result in tabular and graphical form. What are the implications you can draw from your analysis about potential actions by market participants (MNCs, Banks, forex traders)?

Since you will have quarterly future rate data from public sources, you can use the linear/nonlinear interpolation method in Excel / Numbers or other data analyzing software to fill the missing data to generate monthly future rates. If you are unsure of what is interpolation, and how to do that in Excel, please visit credible websites to form your understanding.

Testing IRP, PPP, and IFE

The student should outline what is IRP, PPP, and IFE? What how these parity theories are tested. What are the steps taken to test these theories using the last five years (60 data points) data?

Use both tabular and graphical presentations. If you are not sure how to create a four-quadrant scatter plot in excel, you can take help from YouTube.

The focus should be given to articulate the potential implications that can be drawn from your analysis about potential actions by market participants (MNCs, Banks, forex traders). For example, whether speculation, covered interest arbitrage, increase in import and export are likely to take place due to lack of IRP, PPP, and IFE if observed in the data.

Testing IRP, PPP, and IFE [200 words]

Testing mechanisms/steps of IRP, PPP, and IFE

Graphical presentation.

Any arbitrage opportunity?

Potential implications MNCs, Banks, forex traders.

Change in bilateral trade, the flow of funds, etc.