Question: CFA question: 1997, Level 3.

A. Explain the following three concepts of purchasing power parity (PPP):

a. The law of one price.

b. Absolute PPP.

c. Relative PPP.

B. Evaluate the usefulness of relative PPP in predicting movements in foreign exchange rates on:

a. Short-term basis (for example, three months)

b. Long-term basis (for example, six years)