Week 5 - International finance Flashcards
What are the two FOREX Quotations?
And what is the difference/how are they defined?
What factors influence the bid-ask spread?
How do you calculate the pertage spread?
How do you find the bid cross rate and the ask cross rate for the following currencies:
What is locational arbitrage?
- Capitalising on exchange rate differentials between locations
- Forces exchange rates to be similar across banks
What is triangular arbitrage?
- Engage in buying/selling three currencies
- cross rates are not equal to quoted rates –> arbitrage
If currency is overvalued then ____
If currency is (undervalued) then ____
- (you sell/use it to) buy another currency
- You buy that currency with another currency
1 What does CIA stand for?
2 And what is it?
3 How is equilibrium attained?
1 Covered interest arbitrage
2 CIA form a relationship between IR (internal rate) of two countries and their forward exchange rate
2 So by deciding on a forward rate equal to the spot rate, investors can profit from investing i foreign countries.
3:
What does IRP stand for?
- And what is the relationship to CIA?
Interest Rate Parity
- Interest rate and forward rates do not permit CIA
- Forward rate should adjust to changes in IR
What are the properties of IRP? Meaning what is the result of differences in i?
How does the IRP graph look?
What does PPP stand for?
Purchasing Power Parity
What is PPP?
And what is the properties?
- The “law of one price”
- Exchange rates should adjust to changes in inflation
What does the PPP graph look like?
Descibe it
What does IFE stand for?
International Fisher Effect
What is IFE?
and what is the properties?
- Same ROI by either investing at home or abroad
- Exchange rate should adjust to changes in IR
What does the IFE look like?
