CFA EXam 6
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Difference Between Absolute and Comparitive Advantage?
Absolute Advantage means you can produce a good cheaper than others. Comparative is in the production of a good, if its opportunity cost in terms of other goods that could be produced is lower than another country.
Ricardian and Heckshcher-Ohlin models of trade.
- Ricardian based on Labor.
- Heckshcer olin is based on Capital AND labor
Tariff, Quota, Export Subsidie, Minimum Domestic Content, Voluntary Export restraint.
- Tariff - Tax
- Quota- Restriction on imports
- Export Subsidy - Gov't pays firm to export
- Miimum - Requires some % of products domestically produced
- Voluntary export restraint - voluntarily restrains so as not to get tarrifed or quota imposed by trading partners.
All of them, reduce imports, raise prices, decrease consumer surplus, increase domestic quantity supplied, increase producer surplus.
Impose restriction on flow of financial capital across borders. It decreases economic welfare, however, in short term controls flow of capital to avoid massive run on banks, and massive influx of capital
Free Trade Areas, Custom Unions, Common Market, Economic Union, Monetary Union
FT - 1.All Barrier to import and export of goods and services are removed (NAFTA)
CustomS Union-1+ 2All countries adopt a common set of trade restrictions with non members
Common Market - 1+2+3 all barriers to movement of labor and capital goods among member countries removed
Economic Union 1+2+3+4 member coutnries establish common instituions and ecomic policy for theu nion
Monetary Union 1+2+3+4+5 Mebers countries adopt single currency
Current Account, Capital Account, Financial Account
- Current Account = goods and services
- Capital Account = Non financial asseets (patents/ copyrights/national resource right/ intangibles)+Fixed Asets
- Fiancial Account - Government owned assets abroad and foreign owned assets in country.
Deficit in current account must be offset by suprlus in combined capital and financial accounts. Trade deficit funded by sale of assets abroad or sales of assets in states
X-M= Private Savings+Gov't Savings-Investment
IMF, World Bank, WTO
- WTO facilitates Trade
- Word Bank - provides assistance to developing countries around the world
- IMF promotes money cooperation and exchange stability
Real Exchange Rate?Equation?
Nominal Exchange Rate?
Real - tells us dollar cost of purcahisng same unit of goods and services based on new excahgne rate and relative changes in price levels. Eqution = nominalx CPI foreign/CPI Base
Nominal - 1.416/Euro in order to purcahse one euo's worth of goods and service will cost 1.416 dollars.
Inflation in UK increases the real $/Euro exchange rate so that a unit of real goods and services in the UK cost relativley more in USD than it did at base period.
Inflation in US decreasse real $/Euro
increase in nominal $/Euro rate when inflation in both contries is eaul increase the real $/Euro Real exchange rate.
Sell Side People? Buy Side?
Buy Side are people looking to invest/hedge including governments, corporations, etc.
Sell side are banks.
Direct Quote, Indirect Quote?
Direct quote is value of unit of a foreign currency in units of home currency. For example 1.4 USD/Euro means direct Quote of USD, because it gives price in Dollars of 1 Euro.
Indirect is reciprocal
The base, is Euro, and price currency is USD
Deprecaitoin and Apprecaiton??
You talk about a currency depreciation or appreciating only in the BASE currency.
- For example in 2010 exchange reate was 1.4$/Euro, in 2011 1.6 $/Euro, The Euro Appreciated 1.6/1.4= 14.28%. Additionally
- The $ depreciated (1/1.6/1/1.4)-1=12%
Cross Rate Calculate?
All you need to know is cross canceling. If USD/AUD and XYZ/USD if you multiply together, USD gets cancelled out. Therefore, just get it so that consistent currency is on bottom, and top of one of equations before multiplying.
Forward Rate Premium?
How much more the forward rate is than the nominal. Forward rate premium, one point is .0001 points away, or 10,000th spot. If it is positive on a particular rate, you add. For example 1.43 Eur/$ with a forward premium of 345.2, 1.43+.03452.
Calculating forward rate consistent with spot rate and interest rate?
Forward/Spot = Domestic/Foreign. If Domestic I/R is more than foreign, forward will be more. For example, Forward of Euro/$ is 1.34 Spot is 1.35 Euro/$, I/R of Dollar is more.
Exchange Rate Regimes 7 Total
- Dollarization - adopt other currency
- Monetary Union - EU, sevearl countries have same currency
- Fixed Peg - Peg to a currency have 1% band
- Crawligng PEg - Exchange rate is adjusted periodically not fixed at 1%
- Management of exchange rates with creaawling bands - width of bands move.
- Managed floating exchange rates - monetary authority influence exchange rate in response to specific indicators in balance of payment.
- Independtly floating
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