econ bra Flashcards
Explain how to convert the Domestic Currency to the forerign currency for a direct quote, what are the acronyms
DAD (Divide down) UBM (Up Buy), so the direct quote is DOMESTIC/FOREIGN so to go from Domestic currency to foreign currency you must DIVIDE
What are 4 factors that effect currency interbank pairs
The liquidity of the currencies, time of day, market vol and the maturity of forward contracts in question
Explain triangular arbitrage
So, you have to work out if if a currency is OVER or UNDER valued by a 3rd party dealer.
Then what you do, from your base currency, is you convert to the currency they are quoting (lets say they’re quoting colombian pesos per venezualan bolivars) and the colombian peso is UNDERValued. and we use USD
That means, we buy colombian pesos with our USD on the normal market, then we BUY bolivars through this dealer, the bolivars are implicity overvalued. THEN we convert to bolivars back to USD on the open market.
What is the cross rate
An implied currency trade trade if there is no active market converting the 2 currencies
If the NZD/COL is trading at 2.7 on a dealer’s exchange, but the cross rate is 3, which is overvalued/undervalued.
Colombian peso is overvalued, NZD is under
What are the acronyms to work out if we use the bid or ask price when doing triangular arbitrage
DAD - Divide Ask Down. For a direct quote going from numerator to denominator, you use the ASK price
UBM - Up Bid Multiply. If you’re going up, use the bid price
Formula for nominal rate
Real rate + Inflation
If the COP has higher expected inflation than the AUD, which currency will appreciate
AUD relative to the COP
For DC/FC, which currency is being sold, and which is bought
SELL DC (cos that is what you have), but FC (that is what you want)
Explain DAD and UBM
Divide Ask Down, Up Buy Muliply.
These are the acronyms you use when determining cross rates, and the like
How to determine the forward discount or premium of a forward currency contract, and what this means
Think of a line, a discount (negative number) means the bottom number is going to depreciate because of inflation.
The formula is Forward - Spot / Spot
If the forward discount/premium is a premium, what does that mean.
That the numerator (domestic currency) will APPRECIATE relative to the base currency because of inflation
Explain offsetting transactions and marking to market
Offsetting is taking the opposite position to what you hold.
Marking to market is taking the value of that offset position against your current position AND DISCOUNTING IT to the reporting period in question
How to mark to market an offsetting transaction
Find the value of the offset transaction e.g.
Your 90 day contract at 1.1%, 30 Days late (at end of reporting period, there is a 60 day forward for 1.05, that 5% differential is the asset you record on your balance sheet, ONCE discounted
Name and briefly describe all exhcange rate theories (6)
Rule of one price - big mac in aus = same value as big mac in colombia
Absolute PPP - same as rule of one price, but for basket of goods
Relative PPP - Price = current price + anticpiated inflation (Spot= 1+inflation DC / 1+inflation FC)
Fisher Equation: Increased interest = increased inflation = decreased value (Spot = Spot (DC interest / FC interest)
Covered and uncovered Interest rate parity = Future price EQUALS Spot (1+IR DC/1+IR FC)
Explain carry trades please
Borrow at risk free rate (1$) then invest in another currency’s risk free rate, then convert back to orignial currency and deduct that % borrowed
If exchange rates do NOT change over the life of a carry trade, what does that mean for the value of currency’s (answer in regard to interest rates)
Tough question here mate, but its like, the country with the higher interest rate SHOULD depreciate more. If the spot rates DONT change, then the currency that SHOUlD have depreciated actually appreicated
Does the Mundel flemming model take inflation into consideration
No
What is the mundel flemming model?
Model to guess exchange rates based on monetary and fiscal policy. Higher fiscal policy = more value, expansionary monetary policy decreases value
Explain the pure monetary and dawbush approach to exchange rates
PURE IR takes inflation into consideration. Expansionary monetary policy increases prices therefore decreases value of dollar. This does not take expectations into consideration
The dawnbush is similar but stipulates that prices are sticky, so it may take markets a while to price in changes. Eventually prices will go back to their expected level, therefore this model DOES take expectations into consideration
If a country does not have its own natural resources, does that effect economic growth
No. You not have ACCESS through TRADE will tho
name 5 factors that effect GDP growth
Increased SAVINGS Markets (investment markets) Stable politics Educated population Decrease tax Free trade
Intertemporal rate of substitution, explain that (from PM_
Marginal utility of consumption FUTURE / Marginal utility of consumption Today
When people are expecting good economic times in the future, they will consume TODAY, perhaps artifically jacking up GDP.
Decreasing it also increases the risk free rate
How is the interest rate and the intertemporal rate of subsitution linked
Rf = (1 / IRTS) -1
Yardeni model
E/P = A rated bond * (yardeni weight * Earnings growth)
Remember cob douglas GDP Growth Formula
GDP Growth = Increase in Total Factor productivity + Increase in capital * capital elastisity + Increase in labour (Elasticity of labour)
What is total factor productivity
Its pretty much the technology or research and development done in a country
Compare emerging and developed countries, which will be more impacted by an increasing population (on its GDP)
The emerging. It is more effeccted by its CAPITAL DEEPENING (Capital / labour) than a developed economy, developed countries are more effected by tech growth
is actual GDP being higher than potential GDP possible?
Yes, if confidence is super high, but it is not sustainable
Explain capital deepening using an example of machines and people
Capital = machines, Labour = people. You need as many machines as people (or even a touch more) to ensure you are marginally profitable
Name the 3 economic growth theories and a brief explanation of each
Classical: That women will exit the workforce to have babies, this increases the labour force until there is diminishing returns
Neoclassical: Long term growth rate theory. there is a long term growth rate that will be acheived, even with minor suprises from incresed investment in capital deepening
Endogenous: Unbound - more investment in tech = unlimited growth
What is capital deepengin
Capital over labour increasing that ratio
What are the 3 types of economic convergencce, what does it mean
The convergence of living standards across countries/
Absolute convergence - countries will converge
Conditional convergence - if population growth, savings rate and productions factors = convergence
Club convergence - similar institutions = convergence over time
According to conditional covergence, if a developed economy has the same pop growth rate, production factors and savings rate as a developed economy, which will have the higer growth rate
the developing country will icnrease faster until it catches up to the developed country
If an developing economy is doing well, gdp is growth fast, what will the real interest rate be in response?
Higher. Think the intertemporal rate of investment
Future/today. Less that 1 = high interest rate, they move inversly
Relative purchasing power states that exchange rates
will change to reflect differences in inflation between countries.
Which of the following scenarios represents a violation of the clean surplus relationship?
The market value of securities held for sale changes.
