Chapter 17 Flashcards

1
Q

When JPY has a higher interest rate than USD,

will JPY sell at a ___, against USD, in the fwd market?

A

The interest rate differential between 2 countries determines if respective currencies will trade at par, discount, or premium in the fwd. mkt

  • CCY1 is @ discount when:
    • CCY1 is worth less in fwd. mkt vs. the spot market.
    • CCY1’s interest rate > CCY2’s interest rate

fwd. rate = spot +/- fwd pts”

*fwd. pts: reflect the diff. between 2 ccy’s/countries’ ST mmkt interest rates (e.g., rates on ST. govt. borrowing or interbank rates) @ trade execution

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2
Q

American option vs. European option:

what’s the difference?

A

American option:

  • can exercise anytime on/before expiration date
  • sells for LARGER PREMIUM vs. European options

European option:

  • exercise only on maturity/expiry date
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3
Q

Speculation

A
  • involves taking a “position” on the direction of the market, in the attempt to make a profit
    • LONG POSITION in a fwd. contract
      • GAIN = underlying asset’s price RISES
      • (loss = underlying’s price decreases)
    • short position gains value when underlying asset’s price FALLS
  • goes beyond hedging
  • (not usually a treasury objective)
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