# Study Session 4: Economics for Valuation

## Currency Forwards (sell against, buy against, gah!!!)

I’m stumped on the language and wondered if someone here may have some rules of thumb that helped you get this through your head.

Economics section, specifically 629-631 in Volume 1 of the CFAI curriculum.  The following statements are made in a couple of places on those pages

> “…bought GBP for delivery against the AUD…” - currency quoted as AUD/GBP

> “…sell the CHF six month forward against the GBP…” - Currency quoted as CHF/GBP

> “…selling the NZD 10 million forward against the USD…” - currency quoted as USD/NZD

## Economics

Hello everyone, while studying for Economics Chapter 2 that is Economic Growth and Investment Decision, I encountered a particular doubt regarding a concept, that is in demographics if Population of above the age of 64 is rising, it impacts will be negative on Long Term Economic Growth. If Population is rising between age 16 to 64, its impacts will be positive on LTEG. My question is how will Population growth below 16 years of age affect the Long Term Economic Growth?

## simple or compound interest rate for currincies

I’m solving a question related to arbitrage opportunities of a currency trade. Period is 3 months. The question gives me annualized 3 month interest rates.

I thought we were supposed to use compound interest unless LIBOR is mentioned, but the answer simply divides the interest rate to four, it’s like:

Suppose that we’re given: 3 month interest rate : %16 (annualized)

Answer : interest rate for the period is %4  ( 16/4)

I’m very confused

## Understanding Alpha

This question is with reference to the alpha (which is the shares of output companies compensate labor and capital with, expressed with values between 0 and 1) in the Cobb-Douglas production function: F(K,L) = KαL1-α

If a country has a capital-to-labor ratio of 1000:1 in comparison to another country which has a ratio of 500:1, what does it imply in terms of the alpha of the Cobb-Douglas function?

## Understanding Alpha

This question is with reference to the alpha (which is the shares of output companies compensate labor and capital with, expressed with values between 0 and 1) in the Cobb-Douglas production function: F(K,L) = KαL1-α

If a country has a capital-to-labor ratio of 1000:1 in comparison to another country which has a ratio of 500:1, what does it imply in terms of the alpha of the Cobb-Douglas function?

## Growth Accounting/Solow Growth Model

Is there any difference between Solow growth model and the Growth Accounting equation/model?

Are both represented by?:

Y = A + (alpha*capital)+((1-alpha)*labor)

I’ve seen, for Solow, the alpha terms be exponents, but it makes no sense when calculating..

## Mark to market economics confusion

I see the numerator for mark to market is FPt - FP but in some practice questions, the variation of FO - FPt is used.

Also, for the denominator, how do we know which rate to use to discount? Sometimes it’s the base currency and sometimes the price currency. What is the rule?

Thank you

## currency exchange problem

Quote 0.008852 - 6 USD/yen, quote 0.02874 - 6 USD/Tawainese dollar(NT).

If i want to buy NT10 million, how much is the cost of yen?

The answer is 32453000 or 32490000? Thank you.

## covered interest arbitrage

can someone explain this question

Spot rate \$0.85 / SF

Three month forward for SF \$0.80 / SF

Three month Interest rate for SF annualized 12%

Three month Interest rate for USD annualized 18%

1 million USD

## Inflation gap and exchange rates

How will an increase in inflation gap in the euro zone relative to the inflation gap in the US affect the dollar?

A. Weaken against the Euro in real term

B. Strengthen against the Euro in real term

C. Strengthen against the Euro in nominal term

The model answer says A is the correct choice but I don’t really get it, can some one help me understand this?