CIMA Exam CIMAPRA19-F03-1 Topic 4 Question 85 Discussion

Actual exam question for CIMA's CIMAPRA19-F03-1 exam

Question #: 85
Topic #: 4

[All CIMAPRA19-F03-1 Questions]

Which of the following best explains why the interest rate parity model is highly effective in practice?

AGovernments actively manage their exchange rates so that parity holds

BDivergence from parity is impossible because exchange rates drive interest rates

CAny divergence from parity can be observed by the market and corrected by arbitrage

DSpeculative forces drive the interest rates and exchange rates together to achieve parity.

Show Suggested Answer

Suggested Answer: A, B, E

by Raylene at May 01, 2024, 10:24 AM

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Sharita

1 months ago

Hey, if governments can't even manage their own finances, what makes you think they can control exchange rates perfectly? Option A is about as realistic as a unicorn riding a flying pig.

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Tomoko

2 days ago

Yeah, I agree. I think option C makes more sense. The market can correct any divergence from parity through arbitrage.

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Shawna

7 days ago

I think option A is a bit far-fetched. Governments have a hard time managing their own finances.

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Phillip

1 months ago

Hah, divergence from parity? Impossible? Option B must be a joke. Market forces are way too chaotic for that. I bet some poor soul who believes that is going to get a rude awakening on this exam.

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Aleta

14 days ago

User 1: I agree, market forces are unpredictable.

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Jame

2 months ago

Option D sounds good to me. Speculators are the driving force behind interest rates and exchange rates, and they'll make sure parity is maintained. It's like magic, really.

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Adell

18 days ago

User 3: It's like a balancing act between the two, with speculators making sure everything stays in line.

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Dona

18 days ago

It's fascinating how speculative forces can drive the market towards achieving parity.

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Earlean

25 days ago

User 2: I agree, speculators play a big role in driving interest rates and exchange rates to achieve parity.

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Kerrie

27 days ago

User 1: I think option D is the best explanation for why the interest rate parity model works.

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Corrina

1 months ago

That's true, they help ensure that any divergence from parity is corrected through arbitrage.

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Jannette

1 months ago

I agree, speculators play a big role in keeping interest rates and exchange rates in line.

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Gayla

2 months ago

I'm not so sure about that. Governments do actively manage their exchange rates, so option A seems more plausible to me. The interest rate parity model has its limitations in the real world.

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Jolanda

2 months ago

I believe speculative forces play a role in driving interest rates and exchange rates together to achieve parity. So, I would go with option D.

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Anglea

2 months ago

I agree with Laquita. The market can observe any deviations from parity and take advantage of arbitrage opportunities.

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Laquita

2 months ago

I think the interest rate parity model is effective because any divergence from parity can be corrected by arbitrage.

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Lera

2 months ago

I think option C is the best explanation. Arbitrage traders are constantly looking for any divergence from parity and quickly correct it, making the model highly effective in practice.

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