Week 11

Question 1

about _____ a day are traded spot in forex markets – more than the annual GDP of Italy or the UK

Answer 1

$2 trillion

Question 2

Uncovered interest parity condition (UIP)

Answer 2

a parity condition stating that the difference in interest rates between two countries is equal to the expected change in exchange rates between the countries’ currencies. If this parity does not exist, there is an opportunity to make a risk-free profit using arbitrage techniques.

Question 3

Currency carry trade

Answer 3

a strategy in which an investor sells a certain currency with a relatively low interest rate and uses the funds to purchase a different currency yielding a higher interest rate. A trader using this strategy attempts to capture the difference between the rates, which can often be substantial, depending on the amount of leverage used.

Question 4

Optimal currency area (OCA)

Answer 4

the geographic area in which a single currency would create the greatest economic benefit. While traditionally each country has maintained its own separate, national currency, work by Robert Mundell in the 1960s theorized that this may not be the most efficient economic arrangement. In particular, countries that share strong economic ties may benefit from a common currency. This allows for closer integration of capital markets and facilitates trade. However, a common currency results in a loss of each country’s ability to direct fiscal and monetary policy interventions to stabilize their individual economies.