Lecture set 2 Flashcards Preview

International economics and financial markets > Lecture set 2 > Flashcards

Flashcards in Lecture set 2 Deck (28)
Loading flashcards...
1
Q

What is E defined as?

A

Nominal exchange rate between two currencies

2
Q

Changes in E can have effects on global trade and capital flows. Changes can arise to 3 factors, which are they?

A
  1. Domestic interest rate R
  2. Foreign interest rate R*
  3. Expected future exchange rate E^e
3
Q

If E goes up what happens to foreign currency?

A

Foreign currency appreciates and domestic currency depreciates relative to foreign.

4
Q

WHat happens to the price of imports if E goes up for domestic?

A

Imports are more expensive

5
Q

Who are the primary traders?

A

Large international banks
Large international coorperations
Large international investment groups
Central banks

6
Q

What are market characteristics?

A

Global currency markets are “over the counter”
Markets for large currencies operate 24/7-liquid markets.
Different finance centers
There are Veichle currencies. *

7
Q

There are 3 types of markets, which?

A
  1. Spot markets (it’s here E is)
  2. Forward markets
  3. Swap markets
8
Q

If you trade two currencies against the same you can calculate the cross-currency, how?

A

Ecc=E2/E1

9
Q

The demand for an asset is a function of?

A
  1. Expected return
  2. Risk
  3. Liquidity
10
Q

When the risk of an asset goes up, the demand goes?

A

Down

11
Q

The longer it takes to sell an asset, i e the less liquid it is, the more

A

Increased risk.

12
Q

We assume that assets has the same liquidity and risk, thus becoming perfect substitutes except for what?

A

Currency denomination.

13
Q

If these two assets are identical, what will be true in equilibrium?

A

The LOOR, R=R*+Ee-E/E which is the UIPC

Identical assets offer identical return

14
Q

How is the CIPC showed?

A

R=R*+F-E/E risk is killed off with forward contract.

15
Q

What will increase expected return on foreign investments?

A

R* and/or Ee goes up

16
Q

What if R increase and total return on a domestic investment. Say Money Supply Ms goes down via CB that push up domestic interest rates, then R>R*+Ee-E/E, what does this trigger?

A

Thris will trigger capital movement out of foregin in to domestic, there is immediate pressure for E do go down.

17
Q

If R goes up, E goes?

A

Down

18
Q

If R* goes up, E goes?

A

Up, this because if foreign assets more attractive, foreign currency is too.

19
Q

If Roi is equal to zero, what does it mean about how risky the asset is?

A

Means that the assets are equally risky if roi=0, they are perfect substitutes and UIPC holds

20
Q

If roi is bigger than zero

A

The domestic asset is riskier

21
Q

If roi is less than zero

A

Domestic asset is less risky.

22
Q

If roi increase, what happens to demand and E?

A

Demand goes down, E goes up.

23
Q

Why might roi change?

A

S-I=X-M
Investment activity
Changes in terms of risk ie. investment risk corrupt govt

24
Q

CIPC is not an?

A

Arbirage condition

25
Q

What does CIPC assume?

A
  1. High capital mobility
  2. active spot(E) and forward(F) markets, that are liquid
  3. No taxes
  4. Identical assets
26
Q

What if the CIPC assumptions does not hold, what will too not hold?

A

The LOOR

27
Q

If F>E then what is true for R and R*?

A

R>R*

28
Q

If F

A

R