GFE FINAL EXAM QUESTIONS WITH COMPLETE VERIFIED SOLUTIONS 2024/2025, Exams of Computer Networks

Download GFE FINAL EXAM QUESTIONS WITH COMPLETE VERIFIED SOLUTIONS 2024/2025 and more Exams Computer Networks in PDF only on Docsity! GFE FINAL EXAM QUESTIONS WITH COMPLETE VERIFIED SOLUTIONS 2024/2025 What is balance of payments accounting of a country's international transactions for a particular time period What is a credit? Item that would cause funds or money to flow into a country (+) What is a debit? Item that would cause funds to flow out (-) What is a positive balance? Negative balance? Surplus, deficit What makes up the Balance of Payments Current account Financial account Net change in official international reserves Net errors Capital account = financial account and net change in international reserves What makes up the current account? +Exports of goods and services -imports of goods and services -/+ income flows based on where the incoming is going -/+ unilateral transfers, typically gifts and remittances What is the current account balance net value of flows of goods, services, income, and unilateral transfers also equals net foreign investment === national savings - domestic capital formation What are the two types of financial account investment? Foreign direct investment (key is 10% ownership, hands on) Foreign/International Portfolio Investment: -investment by non residents of securities -bank deposits (loans and interbank lending) What makes up the financial account? Credits: exports of assets ex: foreign resident increasing her holding of US asset, or US resident decreasing holding of foreign asset Debits: funds flowing out of the country, imports of assets (vis versa example) What are Official International Reserves? money-like assets held by governments and recognized by governments as fully acceptable for payments between them ex: gold in old days, government bonds now Why are foreign exchange assets used now? Most foreign exchange reserves are denominated in a foreign currency held by a nation's central bank (treasury bills, government securities, etc.) -most held in U.S. dollars and China holds the most foreign currency -provides a barrier if there is a market shock What's the statistical discrepancy on BOP? Net result of errors and omissions on both the credit and debit sides When is a country's net foreign investment positive or negative? Positive: current account surplus, net lender Negative: current account negative, net borrower How do you calculate saving Y-C-G saving leftover after goods or services GDP formula Y = C + I + G + X - M What is the official settlement balance? Measures the sum of current account balance plus the financial account balance B=CA + FA Spot exchange rate price for immediate exchange Forward exchange rate price set now for exchange that will happen in the future direct way to hedge What does covered return equal (F + foreign interest) What is covered interest arbitrage? Making a profit when CD is not zero: buying a country's currency spot and selling country's currency forward to make a net profit from combination of difference in interest rates between countries and forward premium on that country's currency if CD > 0 : foreign investment is risk free profit if CD < 0: investment at home is risk free profit What is covered interest parity It is the condition that prevents profitable arbitrage when exchange rate risk has been eliminated by use of the forward exchange market. CD = 0 CIP holds that difference in interest rates should equal the forward and spot exchange rates What's the equation for the forward premium? Difference between the forward and the spot rates F = (f-e /e) = domestic interest - foreign interest What's the CIP formula? forward rate = spot exchange rate * (1 + interest USA / 1 + interest foreign) What is currency carry trade? Borrow in the low yield currency and invest in the high yield currency, making a return that's roughly equal to the difference in the two rates What is the risk? -investor exposed to exchange rate risk because the actual return depends on the actual value of the future spot exchange rate What is the expected uncovered interest differential EUD? difference between the overall expected uncovered foreign investment return and the domestic return EUD = (1 + foreign interest) * expected future spot rate / current exchange rate - (1 + domestic interest) or equivalently, = change in exchange rate + (foreign interest - domestic interest) Covered vs uncovered exchange rates Covered includes the use of forward or futures contracts that are intended to cover exchange rates and serve as a hedge. Uncovered does not involve these forward contracts to cover foreign exchange risk, instead using expected spot rates What does CIP/UIP tell us? CIP: what forward rate should be given interest rate differential and spot exchange rate + relationships between asset returns and currency movements UIP: what spot exchange rate should be given interest rate differential and expectations about ER +US/Switzerland, 90-day bonds. iUS=9%/yr, iCH=5%/yr, e = 1.2 $/SFr, eex = 1.212 $/SFr. +Notice 90 day rates are annual int. rate divided by 4 +iUS=2.25%/90days; iCH=1.25%/90days +What is the expected rate of appreciation? +What happens to e when: +Interest rates (90 days) change (e.g. iUS=2.75% or iCH=1.75%) +A rise in expected spot ER What happens when domestic i increases? domestic i increases -> reposition to domestic assets -> domestic currency appreciates What happens when foreign i increases foreign i increases -> reposition to foreign assets -> foreign currency appreciates What happens when the future spot ER increases foreign future spot ER increases -> reposition to foreign assets -> foreign currency appreciates What's an fx swap? +, one party borrows one currency from, and simultaneously lends another currency to, a second party. The borrowed amounts are exchanged at the spot rate, e, and then repaid at the pre-agreed forward rate, F, at maturity. f-e = e*((1+id)/(1+if) -1 ) What's a cross currency swap? longer-term instrument, typically above one year, two parties simultaneously borrow and lend an equivalent amount of funds in two different currencies. At maturity, the borrowed amounts are exchanged back at the initial spot rate, e, but during the life of the swap the counterparties also periodically exchange interest payments. f-e = e*((1+id+b)/1+if)) - e What is the Law of One Price (LOOP)? Pd = e d/f * Pf domestic price = exchange rate w domestic numerator * foreign price Relative Purchasing Power Parity the idea that a currency in one country should depreciate relative to the currency in a second country by the amount by which the inflation rate is higher in the first country than the second exchange today / exchange base year = (Domestic price today / domestic price in base year) / (Foreign price today / foreign price in base year) Countries with low inflation have currencies that appreciate Do higher or lower interest rates encourage investment? Higher in the short run Defense for a fixed exchange rate intervene in foreign exchange market by buying or selling foreign currency in exchange for domestic currency to maintain or influence the actual exchange rate in the market Impose some form of exchange control which constricts demand and supply in the market Macro policies that alter domestic interest rates to influence short term capital flows What do fixed rates fix to? Commodity, single currency, or basket of currencies How do countries intervene against depreciation? Country's monetary authority intervenes by buying its own currency and selling foreign currency Uses official international reserve assets as the source of dollars it sells Through intervention the monetary authority is financing the country's deficit in its official settlement balance How do countries intervene against appreciation country's monetary authority sells its own currency and buys foreign currency adds the dollars it buys to its holdings of official international reserve assets through intervention, monetary authority is financing the country's surplus in its official settlement balance What are capital controls? interventions on the capital account, limiting asset purchases or access to foreign currency