Economics!

forward exchange rates are generally quoted as

indirect

if base currency interest rate is higher than the price currency, the

forward rate is at a discount

shorting a currency means

borrowing, converting to the other currency, investing at that currency’s rate, and then converting back to repay loan

arbitrage in terms of exchange rates will eventually correct the

spot rate, not the forward

pips are ____ of a cent, and ____ of a dollar

hundredths, ten-thousandths

if the actual forward exchange rate (f/d) is higher than the no-arbitrage rate

borrow the foreign currency

appreciation or depreciation is in terms of the

base currency

exchange rates are quoted as ____ or ____

price/base or base.price

a direct quote means

d/f

purchasing power parity assumes

same price for goods in different currencies

if A’s CPI increases, they (gain or lose) purchasing power of B’s goods

gain

buy-side forex participants

corporate accounts, real money accounts (institutional funds), leveraged accounts (hedge funds + trading desks), retail accounts (individuals, no forwards), governments, central banks, sovereign wealth funds

buy-side forex participants are mostly into

hedging, not active positions (excluding leveraged accounts)

forex sell-side

foreign exchange banks (large, first-tier global banks)

the forex market is generally

unpredictable

the market composition of forex is

mostly currency swaps (fixed for fixed or floating for floating), spot market, less futures + forwards, forex swaps (rolling forwards)

the forex market is mostly based in

London and New York

the CAD is also called the

loonie

the US is included in the ___ pairs but not the ___ pairs

major pairs, cross pairs

selling a rate means selling the

base

the appreciation of the base is not equal than the deprecation of the price currency because the

rates are inverted

selling the base means

bidding (buying) the price

in any exchange rate transaction, your payoff is in the

price currency

exchange rate movements and volatility depend on the

economic stability of the trading country

the ideal currency regime cannot exist but includes

the rate between any 2 countries fixed, all currencies freely exchangeable, each country has independent monetary policy

the more freely floating the currency and more tightly convertibility is controlled (capital restrictions), the

more effective monetary policy

the gold standard refers to when

money supply limited by gold supply, low growth and low inflation

Bretton Woods refers to

fixed policies for exchange rates with periodic realignment when trade balances build, inflation builds

the 1973 Smithsonian Agreement meant

freely-floating currencies, forex volatility increased

ERM means

European Exchange Rate Mechanism, european currencies were limited to band called snake until end of Cold War

in 1999 the currency in Europe became

the common euro

dollarization

using another country’s currency, no control over monetary policy, credibility but not creditworthiness

monetary union

common currency between countries, group monetary power

currency board

fixed exchange rate with domestic currency backed by foreign assets, monetary base limited to trade and capital flows, outflows increased interest rates by depressing prices, seigniorage profit possible from difference in foreign and domestic interest rates

fixed parity

no commitment to back currency, choice of foreign reserve levels, can peg to single or multiple currencies (trade-weighted), central bank credibility key

active vs passive crawling pegs

active means announcing exchange rates to set inflation expectations, passive reacts to domestic inflation

fixed parity with crawling bands

start with peg to anchor inflation expectations then widen into band, gradually become free-floating

managed float

use policy target, such as trade balance, price stability

independent floating rate

central bank has full monetary policy control

trade deficit means

imports greater than exports, must finance with borrowing or selling assets

both the current account and capital account have a 2-way relationship with

exchange rates

trade surplus means

savings increase so global financial claims increase

trade adjustment is slow so

changes in currency create changes in assets prices, capital flows are key to short-term rate changes

in a fixed-rate regime, the adjustment for trade changes is reflected in

interest rates

capital restrictions

any policy to redirect or limit capital flows, usually for policy goals

capital inflow restrictions

limit foreign investment, limit investment in some industries, prevent hot money flows (currency increases and exports decrease due to high interest rates) but not foreign investment

capital outflow restrictions

generally help taxation, limited repatriation of capital and income out of country, restrict wealth outflows, prevent capital flight (by restricting foreign investment in domestic liquid assets)

A CHF is a

Swiss franc

benefits of international trade

countries gain from exchange and specialization (comparative advantage), greater economies of scale, more product variety, increased competition reduces domestic monopolies and increases efficiency, more efficient resource allocation, knowledge spillovers

costs of international trade

possible increase in income inequality, job loss in developed economies, greater competition causes domestic industry decline

trade restrictions

government policies to protect domestic industries, employment, gain tariff revenue, retaliate

tariffs

taxes on imported goods paid by domestic consumers, goal of reducing trade deficit by reducing demand for imports - raise price above free trade price

tariff effect on a small country

price taker, will be effective

tariff effect for large country

importers could lower prices if tariff to preserve market share - redistributes income from exporting country to importing country

quotas

no gov revenue, restricts import quantity - raises domestic price - “quota rent” is captured by the exporting country unless importer auctions import licenses

voluntary export quota

imposed by exporter, who then captures quota rent (welfare loss for importer)

export subsidies

gov payment to firm per export unit

effect of export subsidy for small country

raises domestic price by subsidy, causes high amount of DWL to welfare

effect of export subsidy for large country

lowers world price, not beneficial

countervailing duties

levied by importer against subsidized exports entering country

domestic content provisions

some percent of value-added or components must be domestic origin

capital restrictions

controls on foreign ability to own domestic assets and vice versa

trading blocs include, in order:

free trade areas, customs union, common market, economic union, monetary union

free trade area

no barriers to flow of goods, each country has own policies against non-members

customs union

free trade area + common trade policy against non-members

common market

customs union + free movement of factors of production

economic union

common market + common economic institutions + coordinated economic policy

monetary union

economic union + common currency

regional integration

free flow in region and common policy, faster/easier than WTO, results in reduced trade barriers for members but can mean higher costs (substituting low-cost nonmember imports for high-cost member imports)

trade creation

high-cost domestic production replaced by low-cost member imports

the opposite of trade creation is

trade diversion

if trade creation greater than diversion, results in a

positive net welfare effect

effects of regional integration

reduced conflict, interdependence, living standards converge, consumer choice increases, competitive firms more productive, can hurt low-skill workers in wealthy countries or cause firm failure if non-competitive costs

challenges to regional integration

cultural differences and history, high degree of integration limits independence, labor mobility can thwart plans to raise low-wage income

an intrinsic gain is

beyond profit

geopolitics

how geography affects political and international relations

geopolitical risk

risk associated with tensions or actions that affect normal and peaceful course of relations (economic growth, interest rates, access to key resources, supply channels, risk premiums, asset allocation, geographic exposure)

state actors

national governments, political organizations, and country leaders that exert authority over national security and resources

non-state actors

NGOs, companies, high-profile individuals

political cooperation

countries work together toward shared goal

non-cooperative country features

inconsistent and arbitrary rules, restricted trade and borders, retaliation, lack of technological exchange

motivation for cooperation

national security or interests, economic interest (access to resources, expand domestic firms ability to operate globally)

standardization

result of globalization, creates protocols for goods and services

process standardization example

SWIFT - global interbank communication system

operational standardization example

containerization

resource endowment is

unequal between countries

soft power

influence without force or coercion

institutions

either an established organization or societal practice

strong institutions mean more stable political forces, resulting in

rule of law, human rights, more durable relationships

national interests may conflict with

cooperation

role of decision maker in a country

political parties have short cycles and changing ideals, individuals are autocratic and unpredictable

globalization

process of global interaction and integration

challenges to globalization

financial contagion, nationalism, supply channel risk

features of globalization

economic and financial cooperation by non-state actors, trade, capital flows, currency exchange, information exchange

motivators for globalization

higher profits from new markets, foreign investment, lower costs, access to resources, intrinsic gain=information exchange

costs of globalization

unequal gains, lower ESG standards, job loss, outmigration and capital outflows for some countries, interdependence

threats of rollback of globalization, mitigate by:

exposed vulnerabilities and supply chain issues, mitigate by reshoring essential production, diversifying country sourcing, owning foreign production

archetypes of globalization

hegemony, multilateralism, autarky, bilateralism

hegemony

global but non-cooperative, political, economic and military domination, regional leaders

multilateralism

global and cooperative, mutually beneficial trade among group, extensive rules and harmonization