Learning Outcome Statements

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.