ADM 3318 Chapter Notes - Chapter 9: Econometrics, Market Power, Fisher Hypothesis
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Just as with the price of a good, the price, or exchange rate, of a currency is determined by supply and demand. However, rather than using a traditional supply and demand analysis as shown in Marthinsen, currency traders often consider whether foreign funds will flow into or out of a country as a result of a particular economic circumstance. If foreigners wish to make domestic purchases or investments, foreign currency must first be exchanged for the domestic currency. Thus, foreign funds flowing into a country increase the demand for the domestic currency and it appreciates. Funds flowing out reverse this process leading to depreciation of the domestic currency. In the table, place an X to indicate whether each economic condition will cause foreign funds to flow in or out of the country and whether the domestic currency will appreciate or depreciate.
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Domestic circumstance |
Funds flow in |
Funds flow out |
Currency appreciates |
Currency depreciates |
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Real interest rates are higher than in other countries |
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Risk of civil war |
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Business taxes are raised above world average |
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Expected stock market returns are better than elsewhere |
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Inflation increases |
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A large deposit of rare earth minerals is discovered |
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Rapidly growing manufacturing sector imports more foreign raw materials |
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World commodity prices (such as oil or grain) fall in a country that is a major commodity exporter |
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GDP increases |
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PI falls |
Compute the expected return of a portfolio given these three economic states, their likelihoods, and the potential returns:
Economic State Probability Return
Fast Growth 20.00% 30.00%
Slow Growth 50.00% 6.00%
Recession 30.00% -2.00%
Answer
| | | 8.40% |
| | | 11.33% |
| | | 12.65% |
| | | 15.47% |
Compute the standard deviation of a portfolio given these three economic states, their likelihoods, and the potential returns:
Economic State Probability Return
Fast Growth 20.00% 30.00%
Slow Growth 50.00% 6.00%
Recession 30.00% -2.00%
Answer
| | | 1.28% | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| | | 4.36% | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| | | 7.82% | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| | | 11.34% Year-to-date, Company O had earned -2.10% return. During the same time period Company V earned 8.00% and Company M earned 6.25%. If you have a portfolio made up of 40.00% Company O, 30.00% Company V, and 30.00% Company M, what is the overall portfolio return? Answer
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Compute the expected return of a portfolio given these three economic states, their likelihoods, and the potential returns:
Economic State Probability Return
Fast Growth 20.00% 30.00%
Slow Growth 50.00% 6.00%
Recession 30.00% -2.00%
Answer
| | | 8.40% |
| | | 11.33% |
| | | 12.65% |
| | | 15.47% |
Compute the standard deviation of a portfolio given these three economic states, their likelihoods, and the potential returns:
Economic State Probability Return
Fast Growth 20.00% 30.00%
Slow Growth 50.00% 6.00%
Recession 30.00% -2.00%
Answer
| | | 1.28% |
| | | 4.36% |
| | | 7.82% |
| | | 11.34% |
Year-to-date, Company O had earned -2.10% return. During the same time period Company V earned 8.00% and Company M earned 6.25%. If you have a portfolio made up of 40.00% Company O, 30.00% Company V, and 30.00% Company M, what is the overall portfolio return?
Answer
| | | 5.778% |
| | | 4.270% |
| | | 6.871% |
| | | 3.435% |
Risk that CAN BE eliminated through proper diversification is called _____.
Answer
| | | market risk |
| | | firm-specific risk |
| | | systematic risk |
| | | non-diversifiable risk |
GIVEN: Spot Rate: 1 X = 1.02 Y
30 Day Forward Rate: 1 X = 1.15 Y
Your currency is "X" and you will be paying 345Y. You would ____ because _____.
Answer
| | | pay now; of the irrelevance of payment time |
| | | pay now; it will take less "X" |
| | | pay in 30 days; it will take less "X" |
The amount of one currency needed to purchase one unit of another currency is the _____.
Answer
| | | derivative rate |
| | | exchange rate |
| | | backwardation rate |
| | | over-the-counter rate |
The price of an option is called a(n) _____.
Answer
| | | expiration cost |
| | | holding cost |
| | | premium |
| | | proceeds |
When a futures contract expires, the parties usually _____.
Answer
| | | have a party when losses are low |
| | | take delivery of the contract asset |
| | | do a cash settlement |
| | | swap off liabilities. |
When a forward contract expires, the parties will _____.
Answer
| | | have a party when losses are low |
| | | deliver the contract asset |
| | | do a cash settlement |
| | | swap off liabilities. |
Any asset whose value is derived from the value of some underlying asset is a(n) ____.
Answer
| | | derivative |
| | | primary capital |
| | | spot asset |
| | | intermediary asset |
Which of the following is not traded on an exchange?
Answer
| | | options |
| | | futures |
| | | forwards |
| | | they are all exchange-traded |
A system under which a country's exchange rates are tied to another currency by government policy is _____.
Answer
| | | floating exchange rates |
| | | pegged exchange rates |
| | | convertible exchange rates |
| | | forward rates |
One of the _______ for business with a floating exchange rate system is the _______ planning business activities in an international market.
Answer
| | | disadvantages; difficulty of |
| | | advantages; easiness of |
| | | irrelevant situations; normal |
| | | none of the above |
U.S. dollars deposited in foreign banks are called _____ and interest paid on these deposits is normally tied to _____.
Answer
| | | non-foreign deposits; FED funds rate |
| | | indirect dollars; Discount Funds Rate |
| | | Eurodollars; LIBOR |
| | | none of the above |
____ is a disadvantage of the gold standard.
Answer
| | | Excess currency slowing economic growth |
| | | Excess inflation |
| | | A non-variable beta |
| | | Lack of currency to promote continued economic expansion |
A monetary system in which paper money can be converted directly to gold is a(n) ___.
Answer
| | | dollar backed float |
| | | gold standard |
| | | currency float |
| | | Americanized gold standard |
| | | none of the above |
Reason(s) for the Great Depression following the Great War include:
Answer
| | | trade protectionism |
| | | isolationism |
| | | nationalism |
| | | all of the above |
| | | none of the above |
An agreement between the WW II allies in 1944 designed to prevent the problems leading to the Great Depression and WW II and to rebuild Asia and Europe was the _____.
Answer
| | | Armistice of 1945 |
| | | Bretton Woods Agreement |
| | | Lend Lease Act for Asia and Europe |
| | | none of the above |
A derivative is used to ____ thereby _____.
Answer
| | | float; gaining excess currency for expansion |
| | | peg currency; improving trade with a primary partner |
| | | hedge; reducing/eliminating risk |
| | | none of the above |
Easier business planning is an advantage of the ______ system.
Answer
| | | mixed exchange rate |
| | | floating exchange rate |
| | | derivative exchange rate |
| | | gold standard |
| | | none of the above |
____ is the chance that some unfavorable event will occur.
Answer
| | | Expected return |
| | | Risk |
| | | Coefficient of variation |
| | | Correlation |
