Seminars Flashcards
(26 cards)
- a) What are the key differences between spot and forward FX markets?
The spot market is for immediate delivery, although in practice a deal done today will normally be settled after two working days. In a forward deal, you agree on the price today at which you will exchange two currencies on a specific day in the future
- What is the difference between a direct quote and an indirect quote?
A direct quote shows the amount of domestic currency needed to buy one unit of foreign currency. For example, 1.06 CHF/EUR means 1.06 Euros buys 1 CHF. This is useful for domestic buyers.
An indirect quote, like 1.2 GBP/USD, shows how much foreign currency (USD) is needed to buy one unit of domestic currency (GBP).
- What are cross rates? Provide an example of a cross rate?
The currency exchange rate between two currencies, both of which are not the official currencies of the country in which the exchange rate quote is given in. For example, the exchange rate between € and £ quoted in a U.S. newspaper.
Why might the economy take a long time to achieve PPP?
PPP assumes that identical goods should cost the same across countries once currency differences are accounted for. However, delays in achieving PPP occur because:
Non-homogenous goods (e.g. machine tools) don’t adjust prices as quickly as homogenous goods (e.g. oil, wheat).
Wage-price spiral: Domestic prices often respond to foreign price changes through slow-moving wage adjustments.
Sectoral lag: Prices in sectors like retail may not immediately reflect changes in global input costs (e.g. agriculture/raw materials).
Friction: Trade barriers, transport costs, and market rigidities slow down adjustment.
what is Covered Interest Rate Parity?
Interest rate differentials between two countries are offset by the forward premium or discount on their currencies, ensuring no arbitrage opportunities exist.
Key Uses:
Prevents arbitrage
Used in currency hedging
Helps explain/predict forward exchange rates
Assumptions:
Free capital movement
No transaction costs
No risk of default
Limitations:
Transaction costs & capital controls can break CIRP
Real markets have credit/political risk
1) What are alternative investments?
Although there is no universally accepted definition, they can be referred to as an investment
in any asset class other than the traditional asset classes such as stocks, bonds, foreign
exchange, and cash. Examples may range from gold, art, real estate investment trusts
(REITs), hedge funds, cryptocurrency, etc
What are the main risks involved in investing in alternative assets compared to traditional ones?
the main risks involved in investing in alternative assets compared to traditional ones:
Low liquidity – can be hard to sell quickly e.g., art or real estate,
- Hard to value – can be hard to value and often down to a matter of opinion
- Transaction costs may be high.
- Lack of income from the investments (usually not the case however with real estate),
- The price greatly relies on trends and fashions,
- Regulation lacking (can be a good or bad characteristic),
- Fraud and forgery
How are hedge funds different to mutual funds?
hedge funds different to mutual funds becaase of:
a) Are private investment vehicles that pool resources together, not publicly available
b) Portfolios are much more concentrated
c) Tend to use derivatives much more
d) Go long and short much more
e) Invest in non-public securities
f) Use a lot of leverage
How can investors gain exposure to commodity markets?
investors gain exposure to commodity markets by investment in:
a) The underlying commodity
b) Natural resource companies
c) Commodity future contracts
d) Commodity swaps and forward contracts
e) Commodity-linked assets
Explain the role of Venture Capital Funds?
the role of Venture Capital Funds are to:
VC Funds invests/supports young companies or startup ventures
- Most venture capital funds are set up as limited partnerships
- The management company of VC starts with its own money and raises additional
capital from limited partners such as pension funds. - The success of the new firm depends on the management Therefore, venture capital company places a certain number of restrictions on management to minimise the risk of financial loss
The management company of VC usually sits on the start-up company’s board
of directors
What are the main disadvantages of real estate investments?
the main disadvantages of real estate investments are:Illiquid market
o Properties cannot be quickly and easily sold without a substantial loss in value
longer-term strategy
* Higher fees
o Agent’s commission, closing costs, title search fees, appraisal fees, legal fees,
and government fees (e.g., stamp duty land tax, etc.)
* Significant risks due to the many market inefficiencies
o Real Estate Cycles (recovery, expansion, hypersupply, and recession)
* Management and maintenance
o Financing payments, real estate taxes, insurance, management fees, and
maintenance costs
* Government controls
o policies used to, e.g., maintain the real estate value, prevent bubbles)
* Legal Complexity
What are the main advantages of cryptocurrencies?
They are online ledgers and therefore money can be sent between individuals on a peer-topeer basis without the need to go through a financial institution. They have no physical
association with any authority/country, have no physical representation, and have been
argued to be an alternative currency.
what is the volitility of risk free assets?
risk free assets like t bills have zero volitility.
If you have two risky assets, what is meant by the opportunity set?
It’s the set of all possible combinations of two risky assets (weights w₁ and w₂, where w₁ + w₂ = 1) using only the investor’s own wealth.
The return-risk relationship forms a curve, showing all achievable portfolios and trade-offs between risk and return.
What is another nathe for the Sharpe ratio?
Sharpe Ratio is also known as the Reward-to-Variability Ratio
what is abother name for the treynor ratio?
Treynor Ratio is also called the Reward-to-Beta Ratio
What is the equation for aversion?
U = E(R) - 1/2 A σ 2
Where:
U = investor’s utility
E(r) = expected return
σ 2= variance of the portfolio
A = coefficient of risk aversion
What are the assumptions of CAPM?
Many investors – price takers
* Myopic behaviour – investors plan for only one holding period
* Investors are limited to a universe of publicly traded financial assets
* Investors pay no taxes or transaction costs
* All investors are rational mean-variance optimizers – use Markowitz portfolio selection
model
* All investors analyse the securities the same way – homogeneous expectations
* All investors choose to hold a portfolio of risky assets in proportions identical to the market
portfolio (M)
* M will be the tangency portfolio to the optimal CAL – the CML
What is the January effect?
January effect: Daily returns on stocks appear to be unusually high during the early
days of January
What is the Monday effect?
Monday effect: Daily returns on stocks appear to be unusually negative on Mondays
What is the Turn-of-the-month effect?
Turn-of-the-month effect: Daily returns on stocks appear to be unusually higher during
the turn-of-the-month (usually days -1 to +3)
What is the Holiday effect?
Holiday effect: Daily returns on stocks appear to be unusually higher during the final
trading days before holidays, such as Christmas, Easter, bank holidays etc.
What is the Halloween effect?
Halloween effect:
Daily returns on stock appear to be unusually higher during the months of November, December, January, February, March and April compared to the rest of the year
