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Study Session 4: Economics for Valuation

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?


Hello mates!

I have a doubt, i hope you can help me to solve it, i would appreciate a lot.

If a body is an independent regulator, how we can know if it is a SRO or instead it is not an SRO.

Thanks in advance!

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).


Portfolio Balance Channel

Hey guys.

I would like to know how can I understand (in layman terms) the definition of portfolio balance channel. I have read it but I can’t get what it implies, since the debt sustainability channel seems like quite similar.

I couldn’t find any other topic that could provide a good answer.


Question 26 currency exchange rates

Hello guys,

I hope you can help me about the question 26 of currency exchange rates.

The objective is calculate de mark-to-market value. The only thing i do not understand is how they know the forward points that is - 0.0016.

The information given is the following USD/CHF quotes are currently available in the market:

Spot   1.0301/1.0302

30 days 1.033613

90 days 1.081081

180 days 1.061798

In this problem we entered into a 180-day forward contract 90 days ago.

Marginal Product of Capital (MPK)

Hi, can anyone please help in interpreting this statement, this is from Schweser:

Under Neoclassical theory,

In the steady state, marginal product of capital (MPK) = alpha * (Y/K) is constant, but marginal productivity is diminishing. 

Rate Parity

How do you know if Forward Rate Parity holds (i.e. forward rate is an unbiased predictor of future spot rate)? What does it mean “to hold”? If this hold, then Uncovered IRP holds, but I’m just having a bit of trouble grasping what this truly means. Honestly, I’m not even sure if I’m this question correctly.  Thanks!

Adjusted EBITDA for Depreciation that's embedded in Cost of Sales?

Hi guys:

I’m building a model for an equipment rental company. The company accounts for “Depreciation of equipments on rent” within its Cost of Sales. Therefore, in  its reported EBITDA, depreciation of equipments on rent is not added back.

Should I adjust the EBITDA by adding back the depreciation of equipment on rent please? Would really appreciate your thoughts, thank you!

What does the policy rate mean?

In the context of expansionary / restrictive fiscal policy, what does it mean by a decrease in the policy rate? 

And just to confirm, does more gov spending = expansionary fiscal policy?