Chapter 19

Question 1

Forward Rate and Spot Rate Formula

Answer 1

Question 2

Cross Rate example for MXN/USD and USD/AUD

Answer 2

AUD * MXN

Question 3

Cross Rate example for CHF/USD and NZD/USD

Answer 3

CFA * [1/(Cross Rate for NZD/USE)]

Question 4

90-Day Arbitrage Free Forward Rate Example:

ABE/DUB spot 4.5671
ABD rate 5%
DUB rate 3%

Formula and calculate no-arb forward exchange rate.

Answer 4

Question 5

Forward Ex Rate in POINTS

Ex:
- AUD/EUR Spot = 0.7313
- 1-yr fwd rate quoted at 3.5 points.

What is 1-y fwd AUD/EUR exchange rate?

Answer 5

Question 6

Fwd ex rate as %

Formula

Answer 6

Fwd ex rate = Spot Rate * (1-Fwd Discount).

Question 7

Fwd premium or discount formula

Answer 7

(Foward/Spot)-1

Question 8

If Fwd > Spot

What is base and Price trading at?

Answer 8

Base is trading at Fwd premium
Price is trading at Fwd Discount

Question 9

If Fwd<Spot

What is base and price trading at?

Answer 9

Base is trading at fwd discount.
Price is trading at fwd premium.

Question 10

Expansionary FISCAL Policy

Answer 10

Budget Deficit

Spending > Tax

Question 11

Contractionary FISCAL policy

Answer 11

Budget Surplus

Taxing more > Spending

Taxing the population so putting money in econ.

Question 12

Automatic Stabilizer

Answer 12

Taxes and transfer pmts tend to increase deficits during recessions and decrease deficit during expansions.