FMP 9. Foreign Exchange Markets: LOs

a) Explain and describe the mechanics of spot quotes, forward quotes, and futures quotes in the foreign exchange markets; distinguish between bid and ask exchange rates.

b) Calculate a bid-ask spread and explain why the bid-ask spread for spot quotes may be different from the bid-ask spread for forward quotes.

c) Compare outright (forward) and swap transactions.

d) Define, compare, and contrast transaction risk, translation risk, and economic risk.

e) Describe examples of transaction, translation, and economic risks and explain how to hedge these risks.

f) Describe the rationale for multi-currency hedging using options.

g) Identify and explain the factors that determine exchange rates.

h) Calculate and explain the effect of an appreciation/depreciation of one currency relative to another.

i) Explain the purchasing power parity theorem and use this theorem to calculate the appreciation or depreciation of a foreign currency.

j) Describe the relationship between nominal and real interest rates.

k) Describe how a non-arbitrage assumption in the foreign exchange markets leads to the interest rate parity theorem and use this theorem to calculate forward foreign exchange rates.

l) Distinguish between covered and uncovered interest rate parity conditions.

FMP 10. Pricing Forwards and Futures: LOs

a) Differentiate between investment and consumption assets.

b) Define short-selling and calculate the net profit of a short sale of a dividend-paying stock.

c) Describe the differences between forward and futures contracts and explain the relationship between forward and spot prices.

d) Calculate the forward price given the underlying asset’s spot price and describe an arbitrage argument between spot and forward prices.

e) Distinguish between the forward price and the value of a forward contract.

f) Calculate the value of a forward contract on a financial asset that does or does not provide income or yield.

g) Explain the relationship between forward and futures prices.

h) Calculate a forward foreign exchange rate using the interest rate parity relationship.

i) Calculate the value of a stock index futures contract and explain the concept of index arbitrage.