Write an essay on one of the following two topics:

Topic 1  Discuss the applicability of the four international parity conditions to exchange rate forecasting. (Word limit: 1,200 words ± 20%)

Your essay should:

•  Explain what the four international parity conditions are;

•  Assess the empirical validity of the international parity conditions;

•  Discuss how these parity conditions may be used to forecast exchange rate movements.

Topic 2  Compare and contrast hedging the transaction exposure of receivables and payables. (Word limit: 1,200 words ± 20%)

Your essay should:

• Name the four main contractual hedging techniques for managing transaction exposure;

• Explain how these techniques can be used to hedge transaction exposure, paying particular attention to the differences between hedging foreign-currency receivables and hedging foreign-currency payables;

• Summarise the advantages and disadvantages of each hedging technique;

• Discuss the circumstances under which some of the techniques may be preferred to the others.