International Financial Management: PPP, IFE and Derivatives

Running head: INTERNATIONAL FINANCIAL MANAGEMENT
International Financial management
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INTERNATIONAL FINANCIAL MANAGEMENT
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Table of Contents
Explain why PPP and IFE in theory make derivatives unnecessary and evaluate the differing
ways in which derivatives can protect against the failing of IFE and PPP:...............................2
Reference and Bibliography:......................................................................................................7

INTERNATIONAL FINANCIAL MANAGEMENT
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Explain why PPP and IFE in theory make derivatives unnecessary and evaluate the
differing ways in which derivatives can protect against the failing of IFE and PPP:
Economist and Analyst relatively use international fisher effect and purchasing power
parity on deriving the adequate price for a particular financial instrument. However, the
determination of price is actually derived from the theoretical analogy, where an equilibrium
condition is evaluated to determine actual value for particular financial product. The
theoretical derivation of identifying the actual value is relatively flawed, due to the
continuous change in demand and supply of a particular financial product. therefore, when
International fishes effect and purchasing power parity is not effective than adequate
derivative instruments are used by investors to curb the actual prices in accordance with the
theoretical price. In this context, Titman, Keown and Martin (2017) stated that derivative
instruments are used by investors to detect and hedge the current statistics of a particular
financial product, which is relevantly traded in the capital and currency market.
Moreover, derivative instruments are relatively used by traders to determine the
accurate pricing of a particular financial product. In addition, the presence of international
fisher effect and purchasing power parity nullifies the requirement of derivative instruments,
as it determines the fair value of a particular product. Therefore, investors are not needed to
use the derivative instrument for getting the accurate price of a particular Product. Hence, it
could be assumed that International fisher effect and purchasing power parity reduces the
usage of derivatives by traders to determine relevant prices in the financial market. On the
other hand, Titman and Martin (2014) argued that International fisher effect and purchasing
power parity is only a technical term used to drive prices in theoretical world, which does not
stop the traders from using derivatives in the real-world practice. From the discussion in the
journal Purchasing power parity is relatively a puzzle, which has to Reconcile extremely due