ECN quiz 3.5 Flashcards
When savers move funds from one nation to another to benefit from greater E(e) return, this would lead to…
1. Affect Interest Rates in weaker E(e) country
2. Affect Interest rates in stronger E(e) country
3. Affect IR in both countries & e
- Affect IR in both countries & e
What vars should you consider when calculating maximized E(e)
- Interest Rates
- Current Spot Rate
- Individual’s’ expectations of the future value of the spot exchange rate
Will there be any incentive to shift from one currency to another when E$rr on two types of deposits are =?
No, since the deposits are = then there is no profit to be made i.e. uncovered interest parity
The CIP states an EQ relationship between a set of interdependent economic vars, but
1. does not specify their individual EQ
2. only specifies a small portion of individual EQ
3. is only used to specify E(e)
- does not specify their individual EQ
What does CIP stand for?
Covered Interest Parity
What are the 2 elements in the cost of transactions?
- The cost of transacting in the foreign exchange markets (spot and forward)
- The cost of transacting in the securities markets (domestic and foreign)
Investments in domestic assets require a (larger/smaller) # of transactions
Investments in domestic assets tend to involve (increased/decreased) transaction costs
- smaller
- decreased
People holding $$ will invest in assets denominated in foreign currency ONLY if there is a CI differential (favoring/decreasing) foreign assets larger enough to offset the higher transaction costs involved
FAVORING
What is political risk?
Risk from exercise of political sovereignty by the gov. of a given country
Expropriation, asset freeze, exchange controls are all a form of…
Political Risk
How to avoid political risk?
- Diversify by investing in many countries
- avoid investing in counties that pose serious threat
Define spot rate
current (e) at which one currency can be exchanged for another for immediate delivery
What does UIP stand for
UNCOVERED INTEREST PARITY
