Reading 10. Currency Exchange Rates: Understanding Equilibrium Value
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Learning Outcome Statements
|Reading 10. Currency Exchange Rates: Understanding Equilibrium Value|
|1. Foreign exchange spot markets|
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;
|2. Foreign exchange forward markets|
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;
|3. A long-term framework for exchange rates|
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;
|4. The carry trade|
i. describe the carry trade and its relation to uncovered interest rate parity and calculate the profit from a carry trade;
|5. The impact of balance of payments flows|
j. explain how flows in the balance of payment accounts affect currency exchange rates;
|6. Monetary and fiscal policies|
k. explain the potential effects of monetary and fiscal policy on exchange rates;
|7. Exchange rate management: intervention and controls|
l. describe objectives of central bank intervention and capital controls and describe the effectiveness of intervention and capital controls;
|8. Currency crises|
m. describe warning signs of a currency crisis.
|9. Short-term forecasting tools|
n. describe uses of technical analysis in forecasting exchange rates.