Home > CFA L2, macro economics > CFA Economics, Trading with the World, Foreign Exchange & GDP

CFA Economics, Trading with the World, Foreign Exchange & GDP

This is a short summary on some of the Economics readings in CFA Level 2.

Study Session 4

Chapters: 17, 18 & 20 (2010 curriculum)

BOP

Balance of Payment Equation (holds in real world)

Current Account + Capital Account + Official Reserve Account = 0

Capital Account includes principal investment where as Current Account includes income from those investments, goods and services and unilateral transfers (gifts, remittance by immigrants, pension payments, foreign aid, etc)

The official reserve account is to offset

Foreign Exchange Quotations & Notations

Direct Quote = X units of Domestic Currency per unit of Foreign Currency

· e.g. – if you are in Canada, then a direct quote for EUR would be 1.37 CAD/EUR or 1.37 EUR:CAD

Indirect Quote = X units of Foreign Currency per unit of Domestic Currency

· e.g. – if you are in Canada, then an indirect quote for EUR would be 0.73 EUR/CAD or 0.73 CAD:EUR

Base Currency is the currency with one unit

· Direct quote: Foreign currency is the Base Currency (EUR)

· Indirect quote: Domestic currency is the Base Currency (CAD)

FX Notation, Key takeaways

· EUR:CAD = CAD/EUR

For triangular arbitrage using cross rates:

· go Up the Bid and Down the Ask (in CAD/EUR notation)

GDP & GNI

GDP measures goods and services produced within the geographical boundaries of a country (widely used)

GNI measures goods and services produced by citizens of a country

Expenditure based GDP at market prices includes indirect taxes and subsidies whereas GDP at factor prices does not.

GDP Deflator

· is used to adjust nominal GDP for inflation

· can be used a measure of inflation trends

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