Economics 4333/5333 (INB 4333) Final Exam Study Guide Page 2
Baylor University
Economics 4333/5333 (INB 4333)
Foreign Exchange Markets
Fall 2000
Study Guide for Final Exam
The final exam will be given in our regular classroom on Monday, December 11 from 1:30-3:30pm. You may bring one 8.5 x 11 inch piece of paper with notes on one side only. You may not use visual aids (e.g., magnifying glasses) other than normal vision correction (eyeglasses or contact lenses) to read your notes.
Note also that your article reviews are due at the beginning of the final exam. If you have them done before then, I would appreciate your turning them in early as that will allow me to get a head start on grading.
Below is a list of topics that are "fair game" for the exam. That is, there may be questions about any of these topics on the final exam, but there will not necessarily be a question about all of the topics.
Spot Foreign Exchange Market [Levi text, Chapter 2]
- Quotation methods (direct vs. indirect)
- Settlement dates
- Appreciation versus depreciation
- Triangular arbitrage and cross rates with no transactions costs
- Triangular arbitrage and cross rates with transactions costs
- Synthetic versus Actual cross rates
Forward Foreign Exchange Market [Levi text, Chapter 3]
- Forward premiums and discounts
- Forward rates and expected future spot rates (role of transactions costs and risk premia)
- Swaps
- Forward rate quotation methods (swap points and outright forwards)
- Bid-ask spreads and forward maturity
- Maturity dates and value dates
Currency Futures and Options Markets [Levi text, Chapter 4]
- What are futures contracts? How do they work?
- Marking to market
- Implications of futures price changes for short and long futures positions
- Margin
- Distinctions between forward and futures contracts
- What are options? Puts vs. Calls. Hold vs. Write. American vs. European.
- Option exercise price. Option premium.
- Payoff profiles of options
- Determinants of option premiums
Balance of Payments (BOP) Accounts [Levi text, Chapter 5]
- Trade Account, Current Account, Capital Account, Official Reserves Account
- Surpluses and Deficits of the various accounts and their inter-relationships
- Capital inflows and outflows
- BOP implications of flexible (pure floating) exchange rates
- BOP implications of fixed exchange rates
- BOP implications of central bank intervention in currency markets
Supply and Demand View of Exchange Rates [Levi text, Chapter 6]
- How exchange rate changes affect the supply of and demand for a currency
- How inflation affects exchange rates
- In one country only
- In both countries
- Stability of Exchange Rates
- Short-run versus Long-Run Elasticities and the J-Curve
Modern Theories of Exchange Rates [Levi text, Chapter 7]
- Monetary Theory of Exchange Rates
- Asset Approach to Exchange Rates (Intuition only)
- Portfolio Balance Approach (Intuition only)
Alternative Systems of Exchange Rates [Levi, Chapter 8]
- Exchange rates under the Classical Gold Standard
- Price Adjustment under the Gold Standard
- How the Bretton Woods System Worked
- Price adjustment under Bretton Woods
- How the European Monetary System (EMS) worked
The International Financial System: Past, Present, and Future [Levi text, Chapter 9]
- Why the Bretton Woods System broke down
- Why the EMS broke down
- Arguments favoring flexible exchange rates
- Arguments against flexible exchange rates
The Purchasing Power Parity (PPP) Principle [Levi text, Chapter 10]
- Absolute vs. Relative PPP
- Empirical Evidence on PPP
- Reasons for Departures from PPP
Interest Parity [Levi text, Chapter 11]
- Determining the currency of investment
- Determining the currency in which to borrow
- Synthetic versus actual forward markets
- Covered interest parity with no transactions costs
- Covered interest parity with bid-ask spreads
Hedging Risk and Exposure [Levi text, Chapter 15]
- Whether to Hedge: Managerial Hedging vs. Shareholder Hedging
- Risk premiums and the difference between forward rates and future spot rates
- When are forward rates good predictors of future spot rates
- The peso problem
- Hedging with forwards, futures, and options
- Hedging with swaps, currency of invoicing, mixed-currency invoicing, and sourcing
Sections of the Levi text that will not be covered (directly) on the Final Exam
Chapter 1: All (that is, none of the material in this chapter will be addressed directly on the final exam).
Chapter 3: Payoff Profiles on Forward Exchange (pp. 62-65)
Chapter 4: Payoff Profiles on Currency Futures (pp. 81-83). [NOTE: Payoff profiles for currency options (pp. 94-98) will be covered on the exam.]
Chapter 5: Objectives of Economic Policy (pp. 123-125)
Chapter 6: You will not be asked to do graphical analysis like that in this chapter. You do need to understand the intuition behind the basic lessons of the chapter. I suggest you focus on the chapter summary (pp. 147-148). Appendix 6.1 will not be on the exam.
Chapter 7: Theories of Exchange-Rate Volatility (pp. 163-168)
Chapter 8: Target Zones (pp. 188-191)
Chapter 9: The Third-World Debt Crisis, 1982-89 (pp. 216-220)
Chapter 11: Combining PPP and Interest Parity (pp. 268-271)