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Study Session 5: Economics: Monetary and Fiscal Policy, International Trade, and Currency Exchange Rates

forward exchnage rate Quote

These statements use two different formula for forward quotes:

1) For example, a forward quote of +25 when the USD/GBP spot exchange rate is 1.4158 means that the forward exchange rate is 1.4158 + 0.0025 = 1.4183 USD/GBP.

2) A forward exchange rate quote of +1.78%, when the spot USD/GBP exchange rate is 1.4158, means that the forward exchange rate is 1.4158 (1 + 0.0178) = 1.44 USD/GBP.

How do I figure out when to multiple and When to add the Forward Quote to the exchange rate??

Thanks

Tight vs easy monetary/fiscal policy

Need a quick clarification as to what tight and easy refer to for both monetary and fiscal policies. I think I understand fiscal policy (tight means revenue > spending and vice versa) but I’m a bit confused as to the CFA’s definition for monetary policy.

Forex

Is there an easy way to remember the statement below?

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Forward Contracts Arbitrage

When a given forward rate is less than that implied by interest rate parity, the price currency is considered overvalued. Thus we borrow the base currency, invest it at the price currency interest rate, and convert it back to the base currency by selling the futures contract.

How would we manipulate an arbitrage opportunity if a forward rate is more than that implied by IRP, i.e. when the price currency is undervalued?

Exchange rates (Economics)

Hello, can someone please explain why Schweser notes describe USD/EUR currency pair as 1.41 for example, the “price” they state is always the first currency in pair, so they explain it like 1.41 USD for 1 EUR, which in my opinion is incorrect.

LOS 18.d: Supply and demand for money

I am trying to understand the relationship between security prices and interest rates. According to Schweser, when there is an excess supply of money due to high interest rates, households try to reduce the opportunity cost of holding money by buying securities.

Trade agreements

Hey guys, in example 8 question 1, the text says exporting firms will be a more attractive investment under an FTA. However, in the quota section, it says: “With quotas, foreign producers can often raise the price of their goods and earn greater profits than they would without the quota.”

If the exporter can earn a higher profit with the quota, wouldn’t that mean they are a less attractive investment under an FTA (as they would no longer be earing the quota rents?)

Quotas and importer firms

Hey guys, there is an example question just after the quotas section (e.g. 6, q5.) that mentions that a quota may be better for a firm that imports goods than a tariff. It says that this is because an importer may be able to capture some of the quota rents (which they couldn’t do with a tariff). 

Crowding out effect

Wondering if someone could help me understand crowding out effect; I had understood it as a function of expansionary fiscal policy (increased government spending) which crowded out private investment. I got a question wrong on CFA, which said that crowding out effect is associated with increasing government borrowing

Exchange Rate Targetting

according to CFAI 

If your developing country’s inflation is higher than that of US, to make currency stronger, you, as a policy maker in the developing country would decrease the money supply by selling foreign currency reserves and buying your own currency.