Economics Flashcards
How are currencies quoted and what does it mean to be long or short?
When does settlement occur for currency trades and descibe how bid/ask rates work?
Explain how different timezones affect spreads?
most liquid when UK/NA both open
Explain how spread are effected by volatilities and brokers?
What are the two dealer bid arbitrage constraints and when can triangular arbitrage occur?
Describe the general approach to triangular arbitrage?
What is the relationship that fowrad and spot rates must satisfy?
What is covered interest rate parity and how to the rearranged equation for forward premium/discount?
When will the domestic (base) currency trade at a premium / discount?
How are forward rates usually quoted and why the longer the term the larger the spread?
What is the value of a forward contract at inception and how is mark to market done?
3 - discount to using the appropriate LIBOR rate
What do parity relations and conditions allow for?
What parity conditions show, what is covered interest parity and what do empirical studies show?
What is uncovered interest rate parity and what does it imply?
Under UIRP a country with a higher interest rate will experience what? What if UIRP held ? What do empirical studies show?
UIRP example
What is PPP and the absolute version?
Why is PPP unlikely to hold and what is the relative version and what is ex-ante version?
What inflation differentials cause nominal fx rates to do? What are real exchange rates and the formula? What do empircal studies show about real fx rates?
What is the fisher effect and what happens if UIRP and ex-ante PPP hold?
What does real interest rate parity imply, what do empirical studies suggest?
Summary diagram, what happens if all international parity conditions held? Explain the relationship between F-D inflation differential to change in spot rate and to F-D interest rate differential? Explain the relationships between expected change in spot rate, F-D interest rate differential and Forward discount?
Describe the IMF approach, MacroEcon balance and External sustainability approach?
What is the reduced form economic model approach, what are the empirical observations?
What is the action required to bring fx rate closer to fair value when, CA+ and PPP over/under valued, CA- and PPP over/under valued?
Explain the carry trade and how UIRP is involved
Are carry trades usually high/low leverage, how to account for volatility and PPP is used and what is the policy perspective on the carry trade?
Carry trade example
What is the current account what does CA+/- lead to, whats the relationship between capital account and current account, what is the dominant factor in determining short to medium term exchange rate movements?
What is the four reasons why capital account is dominant factor in short to medium term exchange rate movements?
How do current account imbalances occur through flow supply/demand channel ?
What does the amount of adjustment required to restore balance depend on?
What is the portfolio balance channel?
What is the debt sustainability channel?
What has happened to global capital markets, what are the consequences and what did this bring about?
Describe the relationship between interest rate differential, capital flows and the fx rate and what is the equation? What is the equation linking interest rate differential, carry trade and fx rate?
Explain the impact of increasing interest rates on the real fx rate and the real long term fx rate?
Carry trade is a function of what? What is the relationship between equity markets and fx rates?
Describe expansionary fiscal and monetary policy and the effect of each on fx rates and the more responsive capital flows are to interest rate differentials the …….?
Explain expansionary M&F policy with fixed fx rate and the effect on credit conditions?
Explain the expansionary contractionary F&M policy effect on the currency with high capital mobility and then the same but with capital restrictions?
How does the monetary approach influence fx rates versus mundell flemming
What is the dornbuche overshooting model?
What does the portfolio balance approach fix of the mundell flemming approach and what is the portoflio balance approach?
Explain the effect of expansionary fiscal policy in short and long term and the end result on the currency for each?
What pushes money out of a domestic economy and pulls it into a foreign one, what are the IMF guidelines for undervalued currency and overvalued with no inflation threat?
Guidelines for fair/overvalued when inflation is a threat and if there is a limit to sterilisation? What is the effectiveness for developing/developed economies?
What are the 8 warning signs of a currency crisis?
How does economic growth affect real returns, equity prices and bond prices? What does potential output comprise?
What are the two standard methods of comparing countries well being?
Explanations of differences in GDP growth rate between developed and developing, S&I and financial markets and intermediaries?
Third and fourth reason for differences in growth rate?
- Political stability, rule of law and property rights
Reasons 5 and 6
How is earnings growth impacted by the limit that potential GDP places on growth?
equation for average price of stock market and the implications in short and long term?
Long term equity forcast example
Explain how growth rate in potential GDP affects real interest rates and the affect on general credit quality?
What is the simple and cobb douglas production function?
What does alpha and 1-alpha represent?
Explain the property of CD function that is constant returns to scale?
Explain the property of diminishing marginal productivity and the difference between capital depending and technological progress?
Explain technological progress and capital deepening in relation to the steady state level of output
What is the effect on two countries where one as much higher K/L from higher interest rates, higher uni research and eliminate restriction on foreign investment for low capital country?
What is the growth accounting equation and what is alpha and 1-alpha ?
What is needed to estimate potential GDP, what is the alternative labour productivity method of doing it?
What are the types of natural resources and how may it restrain growth? What is the labour force and what does it depend on?
Explain how population growth, labour force participation and net migration affect labour supply?
What is labour quality and ICT and non-ICT capital?
Explain the classical model of growth theory and its failures?
failures
1) as income/capita increases, population
growth slows, not accelerates
rate of
2) growth rate of technological process > diminishing
returns
Explain the neo-classical solow growth model and what happens at steady state, what is Y/Capita a function of?
What is the equation for Y/K in steady state and what are the implications?
Theta = growth rate of technological progress
What is needed to keep investment constant?
For the Neo-classical model explain capital accumulations, Deepening vs Technology, Convergence and Effect of savings on growth
What is endogenous growth theory and its properties?
What is the output s function of? What is MPK, what does a higher saving rate imply, what can govt do if private sector under invests, what does it say about convergence between devleoping and developed economies?
What are the two types of convergence?
What are the two routes to convergence?
How doe growth occur in an open economy?
Why is regulation necessary, what is a pareto optimal allocation, what are information frictions and externalities?
What is the economic rationale behind weak competition and social objectives?
Why are financial markets regulated? How is commerce regulated?
What are antitrust policies and their purpose?
Who are the regulators and what are the regulations enforced? Who are independent regulator?
Describe industry self regulatory bodies and SRO’s?
What is regulatory capture theory and regulatory competition/arbitrage?
What are the four regulatory tools?
What is the regulatory burden and the net regulatory burden?
What are the two main methods of regulation analysis and the potential effects?
What is a statute, administrative law and judicial law?
Explain club and relative convergence
