econ bra

Question 1

Explain how to convert the Domestic Currency to the forerign currency for a direct quote, what are the acronyms

Answer 1

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

Question 2

What are 4 factors that effect currency interbank pairs

Answer 2

The liquidity of the currencies, time of day, market vol and the maturity of forward contracts in question

Question 3

Explain triangular arbitrage

Answer 3

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.

Question 4

What is the cross rate

Answer 4

An implied currency trade trade if there is no active market converting the 2 currencies

Question 5

If the NZD/COL is trading at 2.7 on a dealer’s exchange, but the cross rate is 3, which is overvalued/undervalued.

Answer 5

Colombian peso is overvalued, NZD is under

Question 6

What are the acronyms to work out if we use the bid or ask price when doing triangular arbitrage

Answer 6

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

Question 7

Formula for nominal rate

Answer 7

Real rate + Inflation

Question 8

If the COP has higher expected inflation than the AUD, which currency will appreciate

Answer 8

AUD relative to the COP

Question 9

For DC/FC, which currency is being sold, and which is bought

Answer 9

SELL DC (cos that is what you have), but FC (that is what you want)

Question 10

Explain DAD and UBM

Answer 10

Divide Ask Down, Up Buy Muliply.

These are the acronyms you use when determining cross rates, and the like

Question 11

How to determine the forward discount or premium of a forward currency contract, and what this means

Answer 11

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

Question 12

If the forward discount/premium is a premium, what does that mean.

Answer 12

That the numerator (domestic currency) will APPRECIATE relative to the base currency because of inflation

Question 13

Explain offsetting transactions and marking to market

Answer 13

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

Question 14

How to mark to market an offsetting transaction

Answer 14

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

Question 15

Name and briefly describe all exhcange rate theories (6)

Answer 15

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)

Question 16

Explain carry trades please

Answer 16

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

Question 17

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)

Answer 17

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

Question 18

Does the Mundel flemming model take inflation into consideration

Answer 18

No

Question 19

What is the mundel flemming model?

Answer 19

Model to guess exchange rates based on monetary and fiscal policy. Higher fiscal policy = more value, expansionary monetary policy decreases value

Question 20

Explain the pure monetary and dawbush approach to exchange rates

Answer 20

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

Question 21

If a country does not have its own natural resources, does that effect economic growth

Answer 21

No. You not have ACCESS through TRADE will tho

Question 22

name 5 factors that effect GDP growth

Answer 22

Increased SAVINGS
Markets (investment markets)
Stable politics
Educated population
Decrease tax
Free trade

Question 23

Intertemporal rate of substitution, explain that (from PM_

Answer 23

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

Question 24

How is the interest rate and the intertemporal rate of subsitution linked

Answer 24

Rf = (1 / IRTS) -1

Question 25

Yardeni model

Answer 25

E/P = A rated bond * (yardeni weight * Earnings growth)

Question 26

Remember cob douglas GDP Growth Formula

Answer 26

GDP Growth = Increase in Total Factor productivity + Increase in capital * capital elastisity + Increase in labour (Elasticity of labour)

Question 27

What is total factor productivity

Answer 27

Its pretty much the technology or research and development done in a country

Question 28

Compare emerging and developed countries, which will be more impacted by an increasing population (on its GDP)

Answer 28

The emerging. It is more effeccted by its CAPITAL DEEPENING (Capital / labour) than a developed economy, developed countries are more effected by tech growth

Question 29

is actual GDP being higher than potential GDP possible?

Answer 29

Yes, if confidence is super high, but it is not sustainable

Question 30

Explain capital deepening using an example of machines and people

Answer 30

Capital = machines, Labour = people. You need as many machines as people (or even a touch more) to ensure you are marginally profitable

Question 31

Name the 3 economic growth theories and a brief explanation of each

Answer 31

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

Question 32

What is capital deepengin

Answer 32

Capital over labour increasing that ratio

Question 33

What are the 3 types of economic convergencce, what does it mean

Answer 33

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

Question 34

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

Answer 34

the developing country will icnrease faster until it catches up to the developed country

Question 35

If an developing economy is doing well, gdp is growth fast, what will the real interest rate be in response?

Answer 35

Higher. Think the intertemporal rate of investment | Future/today. Less that 1 = high interest rate, they move inversly

Question 36

Relative purchasing power states that exchange rates

Answer 36

will change to reflect differences in inflation between countries.

Question 37

Which of the following scenarios represents a violation of the clean surplus relationship?

Answer 37

The market value of securities held for sale changes.