Assuming the exchange rate is measured in direct quotation and that a PPP trading rule is adopted, if the actual exchange rate is higher than the PPP rate, then:
A) the foreign currency should be bought
B) the foreign currency should be sold
C) the foreign currency should be sold short
D) the foreign currency should be sold and/or the foreign currency should be sold short

Question

Quizplus · Accepted Answer

When the actual exchange rate is higher than the PPP (Purchasing Power Parity) rate, it indicates that the foreign currency is overvalued. In this scenario, selling the foreign currency or selling it short are strategies to profit from the anticipated adjustment towards the PPP rate. Selling involves exchanging the foreign currency for the domestic currency now, expecting to buy it back cheaper later. Selling short involves borrowing the foreign currency to sell now, planning to repurchase it at a lower price. Both strategies aim to capitalize on the expected depreciation of the overvalued currency.

Assuming the Exchange Rate Is Measured in Direct Quotation and That