Economics

Question 1

Forward premium

Answer 1

Notional((Forward rate – Spot rate)/(1+MRR(t/360) ))

Con currencies
Spot (fc/dc) ((MRR fc - MRR dc)(t/360))/(1+MRRdc*(t/360))

Question 2

o mark-to-market value–> FWD Premium con currencies

Answer 2

Notional((Spot rate+six months points)– Forward rate)/(1+MRR(t/360) )

devo andare opposta ai movimenti di prima-> se prima compro USD ora vedo USD con ask
Spot = forward = MRR valuecurrency
Notional price currency?

Question 3

• Covered interest rate parity

Answer 3

Spot rate (USD/EUR)*((1+USD one year nominal interest rate)/(1+EUR one year nominal interest rate ))

forward premium or discount exactly offsets differences in interest rates
o investor would earn the same return investing in either currency.
o Covered in this context means it holds by arbitrage.

Question 4

• Uncovered interest rate parity

Answer 4

 Expected rate = Spot *(1+(DCr-FCr))

expected future spot exchange rates offset differences in interest rate
o expected spot price not market traded uncovered interest rate parity does not hold by arbitrage.
o Investors are risk neutrals

Question 5

• International Fisher relation

Answer 5

RA − RB = E(inflationA) − E(inflationB)
o difference between countries’ nominal interest rates = difference between expected inflation rates.
o If International Fisher relation hold  Interest rate differentials = inflation differentials
o  we can use inflation differentials to forecast future exchange rates which is the premise of the ex-ante version of PPP

Question 6

Profit on carry trade–> FX carry trade

Answer 6

I want to borrow EUR and invest in AUD
I need EUR/AUD spot(t=0) and EUR/AUD in one year (t=1)

((1+(AUDr))*(spot EUR/AUD t0)) / (spot EUR/(AUD ) t1)

Logica: investo AUD quindi devo vedere quant’è la AUD nel future
Quindi moltiplico il rate della currency che investo nel future
Se ho MRR lo converto in r

• Long position in high yield, short position in short yield
• Exposed to crash risk
• T-distribution (negative skewness and excess kurtosis (fat tails))

Question 7

Rental price of capital = marginal cost of capital

Answer 7

αY/K = r
dove alpha = factor cost of capital
Y =Current real GDP
K Current capital base

Question 8

Growth rate in potential GDP

Answer 8

TK(a)L(1-a)

Question 9

G (neoclassical growth theory)

Answer 9

((Technology growth))/(Labor’s share of GDP)

Question 10

Net reg. burden

Answer 10

Cost of compliance – Private benefits + Indirect cost of regulations

Question 11

• Absolute PPP:

Answer 11

o law of one price but concerns a basket of goods rather than a single good (you take the average and not the single good anymore)
o The foreign price level (in domestic currency) = domestic country’s price level

Question 12

• Relative PPP

Answer 12

rate of change in FX rate is a function of inflation differentials between two countries

Question 13

When I have depreciation

Answer 13

o Current account deficit
o When I have a lot of import
o If the country has too much debt

Question 14

• Capital controls and central bank intervention

Answer 14

o reduce excessive capital inflows
o prevent excessive appreciation of domestic currency
o purse an independent monetary economy

Question 15

Signs of an Impending Currency Crisis

Answer 15

o Terms of trade deteriorate.
o Official foreign exchange reserves dramatically decline.
o Currency value is higher than the mean-reverting level.
o Inflation increases
o free flow of capital.
o Money supply relative to bank reserves increases.
o Banking crises occur
o Fixed or partially fixed exchange rates exist

Question 16

Classical growth theory

Answer 16

: growth in real GDP per capita is temporary
 Existence of subsistence real wage –> minimum salary

Question 17

Neoclassical growth theory

Answer 17

sustainable growth rate = function of population growth, labor’s share of income, and the rate of technological advancement. Growth from other means, are only temporary. (example: increase in savings –>only temporarily raise of growth BUT countries with a higher savings rate will enjoy a higher capital to labor ratio and higher productivity)
 neoclassical theory assumes diminishing returns to capital
 technology g/ labor’s share of gdp
 Capital deepening (increase of labor per worker) lead to temporary growth but growth will revert back to the sustainable level if there is no change in technology
 The growth rate in an economy will move toward its steady state rate regardless of initial level
 In steady state –> marginal product of capital = rental price of capital

Question 18

Endogenous growth th

Answer 18

 economic growth is a function of: creation of knowledge capital (R&D, tech advance) and real interest rate.
 investment in capital can have constant returns.
 permanent increase in growth rate attributable to an increase in savings rate

Question 19

• absolute conv

Answer 19

less-developed countries will converge to the standard of living of developed countries

Question 20

• conditional conv

Answer 20

convergence in living standards will occur for countries with the same savings rate, population growth, and production functions

Question 21

• club conv

Answer 21

some less developed countries may converge to developed standards if they are in the “club” of countries.club = countries with similar institutional structures (property rights and political stability)

Question 22

• Self-regulatory bodies (SRBs

Answer 22

No government recognition

Question 23

• Self-regulating organizations (SROs

Answer 23

government recognition; common-law countries, funded by government

Question 24

• regulatory capture:

Answer 24

regulatory body will be influenced or even controlled by the industry that is being regulated.