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International finance Flashcards

1
Q

how to calculate bid-ask spread

A

ask-bid
———- x 100
ask

there should be two answers for this. one should have ask as the denominator and the other should have the bid

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2
Q

what is the bid ask spread

A

the difference between the bid and ask price

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3
Q

what is the bid price

A

the highest point a market maker (banker or broker) is willing to buy

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4
Q

what is the ask (offer) price

A

the lowest point the market maker (banker or broker) is willing to sell

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5
Q

what is the cross rate

A

an exchange rate between a currency pair to which neither currency is compared to the US

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6
Q

what is the forward premium

A

when the expected future price of a currency is above spot price which indicates a future increase in the currency price.

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7
Q

how to calculate the forward premium

A

spot- forward
——————– X 360/180 (annualise)
spot

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8
Q

what is the forward discount

A

when the forward rate is less than the spot rate

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9
Q

when you take a short position what does it mean.

A

It means you are expecting stock price to fall

you borrow shares now and pay them back at a later date.

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10
Q

when you take a long position what does it mean

A

it means you are expecting stock price to rise

you buy shares now and sell them at a later date

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11
Q

what the difference between the forward and future contract

A

forwards- OTC and personalised contract
forwards need to be individual when they are attacking

futures- standardised and regulated contracts

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12
Q

what is a call option

A

an option contract with an opportunity to buy

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13
Q

what is a put option

A

an option contract with an opportunity to sell

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14
Q

what does an X or an E mean when we are talking about forward contracts

A

strike price-

For call options, the strike price is where the security can be bought by the option holder; for put options, the strike price is the price at which the security can be sold.

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15
Q

long call contract owner has an obligation or a right to buy

A

has the right to buy. Because he is in the option market he is not forced to buy when the contract expired

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16
Q

does a short call seller have an obligation or right to sell

A

is obliged to sell the contract if the option is exersized

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17
Q

does a long call option owner have an obligation to sell or the right to sell

A

has the right to sell

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18
Q

what does it mean when an option is classed as on the money

A

the strike= spot

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19
Q

what is the difference between a European contract and an American forward contract

A

an American contract is free and can be exercised at any point up until the expiration date.

European contract can only be exercised at the expiration date

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20
Q

what does it mean when an option is classed as out of the money

A

call= strike price is greater than spot

put= strike price is less than the spot

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21
Q

what does it mean when an option is in the money

A

call= strike is lower that the spot. exercise the option to buy the stock for less than the market and immediately sell it at the higher market price.

put= strike price is higher than the spot
giving the holder the right to sell the option above the current market price

22
Q

why would a trader engage in an out of the money contract

A

because these contracts may have time value.

More time that remains until expiration generally means a greater time value of the option. Investors are willing to pay a higher premium for more time because the contract will have longer to profit from a favorable move in the underlying asset.

23
Q

when a price increase is expected what shall i do

A

Long call
buy call option.
sell put option

24
Q

when a price decrease is expected what shall i do

A

sell the call options.
the option seller will keep the premium if the price closed below the strike price.

buy put option. sell now

25
Q

what is included in the balance of payments current account

A

a record of a country’s international transactions with the rest of the world.

Imports and export

Unilateral transfer (aid or gifts)

26
Q

what is included in the balance of payment capital account

A

shows the investments and income flow between countries

The transfer of ownership of fixed assets and of funds received for the sale or acquisition of fixed assets
Gift and inheritance taxes
Death levies, patents, copyrights, royalties
Uninsured damage to fixed assets

27
Q

what does a capital account deficit show

A

that there is more money flowing out

28
Q

what does the financial account on the balance of payments show

A
  1. domestic ownership of foreign assets.
  2. the foreign ownership of domestic assets.
29
Q

describe the binomial model

A

binomial models are used to price options.

the assumptions are that there are two possible outcomes—price moves up, or a move down.

When the pay off in both outcomes is equaly that is the price of the option.

30
Q

what is interest rate parity

A

difference between interest rate of 2 countries should be equal to the forward rate discount or premium of the foreign currency

31
Q

How can i profit of IRP differences

A
  1. does irp hold
    spot X interest a/ interest b
    =theoretical forward rate.
  2. borrow currency
  3. trade at spot
  4. invest at higher interest
  5. sell at forward
32
Q

what coniditions are required for IRP to hold.

A

1.easy capital mobility.
2.substitutability of assets

33
Q

what is the difference between uncovered and covered interest rates.

A

Covered- the difference between two international rates should be equal to the forward premium or discount.

Uncovered- the difference between two interest rates should be equal to the rate of change in exchange rates.
(doesn’t use derivatieves)

both have NO arbitrage theory – no profit could be made on the foreign exchange market

34
Q

what is the law of one price (LOOP)

A

a price of a good should be the same in all countries (once measured in a common currency)

35
Q

what is the purchasing power parity.

A

the exchange rate in which you would be able to buy an identical basket of goods for the same price.

36
Q

why may purchasing power parity not hold.

A
  1. trade restrictions
  2. services like haircuts are less substitutable and easily traded.
  3. countries highly dependant on oil may be prone to inflation or sudden price changes.
37
Q

how to calculate purchasing power parity.

A

cost of good in county 1
—————————–= exchange rate
cost of good in country 2

38
Q

what is the difference between absolute purchasing price parity and relative purchasing price parity.

A

Absolute PPP price ratio level of exchange rates should be aligned

Relative PPP- rate of change in exchange rate should equal inflation rate

39
Q

country a has a lower interest rate than country b. Does this mean there should be a forward premium or discount for currency of country a

A

there should be a forward premium.

According to IRP theory the currency of a country with a lower interest rate should be trading at a forward premium in terms of the currency with the higher rate.

40
Q

what forward strategy do i need to do to mitigate against currency risk

A

buy a put option Look this up

41
Q

what is the difference between a bullish and a bearish investor

A

bullish- assumes the stock price will rise

bearish- assumes prices will fall.

the chicago bulls win everything

42
Q

explain a short call.

A

a short call is a trading strategy used to profit a future fall in underlying value.

we sell the option to buy. If market prices is lower than the exercise price on the date of expiration a buyer will have no incentive to exersize the contract and the seller will profit from the future premium.

43
Q

explain a long put.

A

a long put is a trading strategy used to profit from a future fall in underlying value.

we buy the option to sell. If market prices are lower than the strike price we can sell our asset at the (higher) strike price.

44
Q

explain a short put.

A

a short put strategy is used to profit from a future increase in price of an underlying asset

we sell the option to sell. If the future spot is higher than the exercise price then it makes no sense for a seller to exercise the contract. In this case we benefit from the premium.

45
Q

explain a long call.

A

a long call strategy is used to profit from a future increase in the price of an underlying asset

we buy the option to buy. if the future spot price is higher than the exercise price we can buy at the cheaper strike price.

46
Q

which trading strategies profit off the futures premium.

A

short call and a short put

47
Q

what did the Bretton Woods Agreement establish

A

The IMF came into formal existence in December 1945, when its first twenty-nine member countries signed its Articles of Agreement.

The countries agreed to keep their currencies fixed but adjustable (within a 1 percent band) to the dollar, and the dollar was fixed to gold at $35 an ounce. (1944)

48
Q

what is the direct interest rate.

A

how many dollars i need to buy a foreign currency

The quote is direct when the price of one unit of foreign currency is expressed in terms of the domestic currency.

USD/GPB
When it is direct domestic comes first.

49
Q

what is a cross currency exchange rate

A

The exchange rate between two currencies where neither currency is the US dollar

50
Q

what is the indirect exchange rate

A

how much foreign currency do i need to buy one dollar

when the price of one unit of domestic currency is expressed in terms of Foreign currency.

GPB/ USD.

Indirect prioritises foreign

51
Q

if €1 = $1.25 which is the denominator

A

dollar is the denominator. 1 is always the value on the top.

52
Q

if you want to express the value of the dollar in terms of pounds which is the denominator

A

GPB/ USD

You want to express the value of the dollar in pound so this number will be different to 1.

ieseg (3 decks)

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