Week 12 Lecture Notes FINS1612 Review

Foreign Exchange Rates

how to calculate and interpret forward exchange rates points

drivers of currency values (supply/demand curves)

Interest Rate Determination

macro-economic context of Interest Rate Determinate

o objectives of Central Bank
o predicting the effect of monetary or interest rate policy response
Loanable Funds Theory
o formal model for supply of funds in the financial system
o what determines supply/demand
term structure of interest rates:
o how do interest rates vary with time to maturity?
o Pure Expectations Theory and its assumptions
o Segmented Markets Theory and its assumptions
o Liquidity Premium Theory and its assumptions
o theories influence the shape of the yield curves
risk structure of interest rates
o high risk of borrower = higher interest rate
how to interpret different types of yield curves

Futures and Forwards

when does a long/short position profit/lose

closing out: taking the opposite transaction as the initial position
hedging futures contracts
risks and the effect on a perfect hedge
settlement of FRA futures are settled, FRA are closed out with payment

Options Markets

option strategies need to know when to use long or short straddle

o ignore the other multiple option strategies in the text