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L2 14 Currency Exchange Rates: Determination and Forecasting > b identify a triangular arbitrage opportunity, and calculate its profit, given the bid–offer quotations for three currencies; > Flashcards

b identify a triangular arbitrage opportunity, and calculate its profit, given the bid–offer quotations for three currencies; Flashcards

L2 14 Currency Exchange Rates: Determination and Forecasting (16 decks)

A calculate and interpret the bid–ask spread on a spot or forward foreign currency quotation and describe the factors that affect the bid–offer spread;

b identify a triangular arbitrage opportunity, and calculate its profit, given the bid–offer quotations for three currencies;

c distinguish between spot and forward rates and calculate the forward premium/ discount for a given currency;

d calculate the mark-to- market value of a forward contract;

e explain international parity relations (covered and uncovered interest rate parity, purchasing power parity, and the international Fisher effect);

f describe relations among the international parity conditions;

g evaluate the use of the current spot rate, the forward rate, purchasing power parity, and uncovered interest parity to forecast future spot exchange rates;

h explain approaches to assessing the long-run fair value of an exchange rate;

i describe the carry trade and its relation to uncovered interest rate parity and calculate the profit from a carry trade;

j explain how flows in the balance of payment accounts affect currency exchange rates;

k describe the Mundell–Fleming model, the monetary approach, and the asset market (portfolio balance) approach to exchange rate determination;

l forecast the direction of the expected change in an exchange rate based on balance of payment, Mundell–Fleming, monetary, and asset market approaches to exchange rate determination;

m explain the potential effects of monetary and fiscal policy on exchange rates;

n describe objectives of central bank intervention and capital controls and describe the effectiveness of intervention and capital controls;

o describe warning signs of a currency crisis;

p describe uses of technical analysis in forecasting exchange rates.

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