# Study Session 4: Economics for Valuation

## 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) = K^{α}L^{1-}^{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) = K^{α}L^{1-}^{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

Please help!

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

can anyone please help me confirm with the answer of the following currency ex 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?

## There is no logic behind Covered & Uncovered Interest Rate Parity

Hi guys,

In the real world, we would expect that when a central bank of a particular country raises interest rates, that country’s currency starts to appreciate, much like the US dollar has appreciated ever since the Fed started raising rates since December 2017.

Why then, does the Covered and Uncovered Interest Rate Parity state that the currency with the higher interest rate should trade at a forward discount and a lower expected spot price in the future, (respectively for Covered & Uncovered).

Regards

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