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Study Session 4: Economics for Valuation

Uncovered interest rate parity

For UIP, the expected change in future spot rate = interest country A - country B, therefore, if interest rate country A is greater than B, we would expect to see currency A depreciate against B.

However, I believe that if interest rate in country A is greater than B, we should expect capital inflow to A and outflow from B leading to appreciation  of currency A.

Why does UIP yield different outcome to capital flow perspective? 

Economics

In Example 3-Blue Box,pg 554 of Economics reading 11, Currency Exchange Rates: Understanding Equilibrium Value, current all-in bid rate for delivery of GBP against the CHF in three months for CHF/GBP currency pair is asked This is calculated by adding the forward points to the bid rate. But in part 2 of the question, the all-in rate to sell the CHF six months forward against the GBP is calculated by adding forward points to the ask rate. Why is that? I am confused.

Regulatory Economics

Dear all,

One portion of the Regulatory Economics’ chapter is very unclear to me. Can someone please define and give examples on what are and what differentiate:

Independent regulators that are SROs

Independent regulators that are not SROs

SROs that are not independent regulators (are they “outside bodies” like FASB?)

Government agencies

Thank you all, and good luck to all of us preparing for Saturday’s exam!

BOP Question from CFAI Mock B

Can someone be so kind to explain the differences between Flow supply/demand mechanism and Portfolio balance mechanism?

Cross Rates

The below answer is confusing me. Is there a better way to go about this problem? Thanks!

CFA Question Bank - Economics - Question 9 - Why is USD foreign price?

Hi all, the question asks to calculate the USD/NZD spot price one year from now. 

Bid ask USD/NZD= 0.6740 / 0.6770

1y Libor USD / NZD= 0.80% / 2%

The solution suggests to use the uncovered interest parity model:

Se=Ff/d=Sf/d(1+if/1+id)

in the solution they also say that USD is the foreign currency, therefore the solution is mid-price USD/NZD 0.6755 x (1.008/1.02) = 0.6766

Has anyone solved this question? Why is USD the foreign ccy? 

Schw Volume 2 Q.12

Why is this sentence incorrect?

“Whenever the funding currency appears to be signigicantly overvalued according to PPP. the position should be reversed”

pure monetary model

A bit confused regarding the explanation of pure monetary model in the CAFI,

Reasons for widening a bid and ask spreads

I will recap the reasons for widening a bid and ask spreads below, if there are other reasons or if I’m mistaken in one of them, please add your comment;

1. Lack of Liquidity

2. Economic Crisis

3. Small sized transactions