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MindMap Gallery Economics CFA Level 2
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Economics CFA Level 2
Regarding the mind map of Economics CFA Level 2, this map introduces exchange rates, economic growth, and regulatory economics. I hope this mind map will be helpful to you.
Edited at 2023-09-13 19:56:38
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Economics CFA Level 2
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- Outline
economics
exchange rate
bid-ask spread
basic concept
bid price
ask/offer selling price
All from the perspective of the counterparty (bank), buying low and selling high The bank buys my currency at a low price and sells its own currency at a high price.
bid-ask spread
type
between clients & market makers
Market makers & interbank market
Influencing factors: mainly liquidity
interbank market
Large trading volume, mainstream currency pairs have good liquidity and small spreads
Trading hours: The main foreign exchange trading centers are open, trading is active, liquidity is good, and spreads are small
The greater the market volatility, the greater the spread.
Market Maker Bid-Ask Spread
Positively related to the inter-bank market spread
The larger the transaction size, the wider the spread
The market maker has a good relationship with the customer, the customer has good credit and the price difference is small.
triangular arbitrary steps
Calculate cross exchange rates
Cross Rates: Accounting for Bid and Bid Spreads
Multiply same sides and divide opposite angles
Determine the possibility of arbitrage
Profit=6.42/6.3025-1
If there is no crossover, there will be arbitrage opportunities
Determine arbitrage methods and profits
forward
Quotation: Basis Point Method
Spot exchange rate 0.0001 × basis point = forward exchange rate
If the forward date is greater than the spot date, the premium is premium; otherwise, the premium is discount.
Steps to Calculate Mark-to-Market Value
Create an inverse contract to the original forward contract
Determine the forward rate for an inverse contract
Calculate net cash flow on settlement date
Calculate the present value of net cash flow on the calculation day
international relations parity
interest rate parity
covered interest rate parity
Principle: The law of one price, 1 yuan invested in the home country = 1 yuan invested in a foreign country and then exchanged for the domestic currency
Lock forward rate
rx is the domestic exchange rate ry is the foreign exchange rate
Currencies with high yields face depreciation pressure: depreciation offsets interest rate advantages
Uncovered Interest Rate Parity
Principle: It is impossible to use forward exchange rates to lock future transaction exchange rates, and can only use estimates of future spot exchange rates.
No forward rate locked
Assumption: risk neutral
Forward exchange rate parity
The forward exchange rate is an unbiased estimator of expected future exchange rates.
purchasing power parity
The relationship between exchange rates and price levels (inflation rates) of two countries
absolute purchasing power parity
Principle: The law of one price allows free trade transaction costs to be 0. The same product should be priced the same in the same currency no matter where it is sold.
price level ratio
Relative purchasing power parity (established in the long run)
ex ante relative purchasing power parity
Those marked with an e are predictions of events
Future exchange rates can be predicted by the difference between expected inflation rates. Currencies with high expected inflation will depreciate in the long term.
ex post relative purchasing power parity
Before looking at time t, the relationship between the exchange rate ratio and the inflation rate ratio is
All variables are post hoc and do not require prediction
in conclusion
If a country has a high inflation rate, its currency will depreciate in the long run.
International Fisher Effect
real interest rate parity
Convergence of real interest rates in different markets
International Fisher Effect
Under the condition that real interest rate parity is established, the difference between the nominal interest rates of the two countries is determined by the difference in expected inflation.
The establishment condition is that real interest rate parity depends on uncovered interest rate parity and ex ante purchasing power parity.
established in the long run
Parity is directly related to
Covered interest rate parity is established in the short run, while other parities are established in the long run.
If forward exchange rate parity holds, non-covered interest rate parity holds, and vice versa.
Uncovered interest rate parity, ex ante purchasing power parity, and international Fisher relations, if two of the three are true, the third one is true.
If all parities hold, arbitrage profits cannot be sustained.
If relative purchasing power parity holds at any time, the real exchange rate is stable, which is called the equilibrium real exchange rate.
Forex carry trade
principle
Financing in low-interest currency and investing in high-interest currency
Prerequisite for trading profit: non-covered interest rate parity is not established
calculate
risk
type
Need to trade in periods of low volatility
Crash risk, extreme losses
caused by leverage
panic trading
manage
Volatility filtering
Do not trade with high volatility
Valuation filter
Trade at reasonable prices
Balance of Payments
Balance of payments account types
current account current account
Statistics on the flow of goods and services brought about by import and export trade between countries include four sub-accounts: trade in goods, services, investment income and unilateral transfers
capital accountcapital account
Measures the flow of capital transfers and financial investments, including: capital transfers, non-production, buying and selling of non-financial assets, foreign assets held by the country and domestic assets held by foreign countries
official reserve account official reserve account
It can be regarded as a balancing item. If a country's balance of payments account is balanced, the official reserve is zero.
Current Account Capital Account Official Reserve Account=0
influence the exchange rate mechanism
Current Account: Imports and Exports
supply and demand flow mechanism
Current account deficit (more imports) depreciates the local currency, surplus (more exports) the local currency appreciates
Factors affecting the balance of payments
initial deficit level
The deficit level is high, the import-export balance is large, the exchange rate adjustment is large, and the international balance of payments is changed.
The sensitivity of import and export prices to exchange rates
Not sensitive, requires major exchange rate adjustment and changes in international balance of payments
price elasticity of demand for traded goods
Small elasticity, requiring large exchange rate adjustments, changing the balance of payments
Asset Portfolio Balancing Mechanism
The current account is unbalanced, and the wealth of deficit countries is transferred to surplus countries; China has a surplus and buys U.S. debt, but when it sells U.S. debt, the dollar depreciates.
debt sustainability mechanism
Chronic deficits, high debt, reduced trust, capital outflows, currency depreciation
Capital account: capital inflows and outflows; Inflows appreciate, outflows depreciate
real interest rate difference
Real exchange rate = Equilibrium exchange rate Difference in real interest rates - Difference in risk premium
In the short run, real interest rates are positively related to exchange rates
There is a negative correlation between risk compensation and exchange rates
nominal interest rate difference
Real exchange rate = equilibrium exchange rate Difference between real interest rates - Difference in expected inflation - Difference in risk premium
Under tight monetary policy, the exchange rate rises
It has nothing to do with the equity market
Emerging Markets Capital Account
A small amount of capital inflow is beneficial, but an excess is harmful
Excessive inflow hazards
The local value will depreciate sharply in the future.
asset bubble
The scale of foreign debt has increased significantly
Consumers’ advanced consumption increases
Overinvesting in risky projects
The impact of macroeconomic policies on exchange rates
Mundell-Fleming Model Mundell-Fleming Model
Floating exchange rate system: Increase in currency market demand and appreciation; decrease in currency market demand and depreciation
High capital liquidity
Monetary Policy
Affects capital account
Fiscal policy
Affects current account and capital account
low capital liquidity
Monetary Policy
Fiscal policy
Monetary Analysis: From Monetary Policy to Interest Rates to Exchange Rates
pure monetary model pure monetary model
The impact of monetary policy on exchange rates in the long run
Main theories
monetary neutrality
Expansionary monetary policy leads to rising prices, increased inflation, and depreciation of the local currency.
purchasing power parity
Assume that purchasing power parity holds true in the short, medium and long term
In fact, it is not true in the short and medium term
Nominal exchange rate changes, real exchange rate remains unchanged
overshooting model overshooting model
The short-term is the same as the M-F model, and the long-term is the same as the pure monetary model.
Short-term purchasing power parity does not hold, but long-term purchasing power parity holds
There is excessive depreciation of the exchange rate in the short term
Portfolio balance model Portfolio balance model
The long-term impact of fiscal policy
Chronic deficits, currency depreciation
debt monetizationdebt monetization
Printing money is equivalent to expansionary monetary policy and devaluation
tight monetary policy
Depreciation under high capital liquidity
Exchange rate management
government intervention
central bank target
Ensure that the local currency does not appreciate excessively
Reduce excessive inflows of foreign capital
monetary policy independence
Effectiveness of exchange rate intervention
The higher the ratio of foreign exchange reserves to average daily foreign trade turnover, the more effective the intervention will be.
capital controls
Directly restrict inflows and outflows
currency crisis signal
Restrictions on free movement of capital are relaxed
deterioration in terms of trade
Official foreign exchange reserves drop sharply
The real exchange rate level rose sharply
banking crisis
high inflation
Money supply is much higher than bank reserves
Private lending increases
Capital market bubble formation
Economic Growth
factor
6 elements of economic growth
Invest and save
Financial markets and intermediaries
Political stability, law, property rights
education and health
Taxation and Regulation
free trade and capital flows
Factors hindering the development of developing countries, 6 factors are imperfect
Impact on capital markets
Potential GDP: output when resources are fully utilized and labor is fully employed
The relationship between economic growth and stock market
The relationship between economic growth and fixed income market
High GDP growth rates lead to high real yields and high expected real growth rates
Monetary policy is affected by the difference between potential GDP and actual GDP, which affects the overall interest rate. If actual GDP is greater than potential, inflation will lead to monetary tightening policy.
Fiscal deficits, which increase during recessions
High potential GDP growth, improved credit quality, and low sovereign risk
Cobb-Douglas production function Cobb-Douglas
formula
A is total factor productivity, TFP; represents overall labor productivity or technological level
K is the level of physical capital capital
L is the labor level labor
α is the elasticity of capital output or the ratio of capital factors to income output elasticity of capital/share of income paid to capital
1-α is the elasticity of labor output or the ratio of labor factor to income. output elasticity of labor/share of income paid to labor factor
nature
constant return to scaleconstant return to scale
K, L increase by 100%, Y increase by 100%
diminishing marginal productivitydiminishing marginal productivity
application
Output per capita Y/L
Affected by capital deepening and the increase in per capita capital k
Affected by technological progress, that is, the improvement of total factor productivity A
labor productivity curve
Per capita capital change rate
Technology capital deepening
Accounting growth rate
Solow growth accounting equationsolow growth accounting equation
Labor productivity growth accounting equationLabor productivity growth accounting equation
From Y=(Y/L)*L
Unable to distinguish the effects of capital deepening and technological progress on economic growth
sources of economic growth
natural resources
Resource Curse: Dutch Disease
labor supply
population growth
Growth of working-age population
birth rate fertility rate, mortality rate
age mix of population
Labor force participation rate = labor force/working-age population
net migration
average working hours
human capital
education, workforce quality
physical capital
ICT investment, information, communications, technology
Non-ICT investment
Infrastructure
Technology development
economic growth theory
classical thoery
Viewpoint: Economic growth per capita is temporary, and population explosion under limited resources will terminate economic growth.
actually
Per capita income growth will inhibit population growth
The growth in technological level shifts the labor productivity curve upward
Neoclassical Growth theory Neoclassical Growth theory
solow model, developed around the Cobb-Douglas production function, closed economy
View:
Long-term growth depends on technological progress
steady state rate of growth
Steady-state growth rate of output per capita
θThe growth rate of total factor productivity
Steady-state growth rate of aggregate output
Capital deepening does not affect long-term economic growth
In the long term, it depends on technological progress and total factor productivity improvement; technological progress is an external shock and cannot be controlled.
convergence
Convergence of income levels between developed and developing countries
Savings can boost economic progress in the short term
Endogenous Growth Theory Endogenous Growth Theory
Assumption: For the overall economy, there are no diminishing marginal returns of capital
capital
Physical capital, human capital, intellectual capital, R&D costs
R&D spillover effects
View
Continuous economic growth, no steady state
There is no convergence. The income levels of developed and developing countries are different.
Technological progress is an endogenous variable that can be controlled artificially
Convergence theoryConvergence
type
Absolute convergence
It will be the same no matter what
Conditional convergence
When the savings rate, population growth rate, and generation function are the same, they will converge, with the same per capita income growth rate and the same income level.
club convergence
Institutional reforms within national groups reach convergence
path to convergence
Capital accumulation and capital deepening
skill improved
open economy
under the neoclassical model
There is a lot of investment from overseas, and you can borrow money from overseas
Optimize resource allocation based on comparative advantages
Export and achieve economies of scale
Technology import
Competition, improve product quality
Accelerate convergence and steady growth
endogenous growth model
Selection effect: Survival of the fittest
scale effect
backwardation, backward countries are affected by the spillover effects of developed countries and eventually converge.
regulatory economics
Reasons for regulation
Pareto optimal: When returns are constant, frictionless, and external, the market mechanism can achieve effective allocation of resources.
There is information friction and information asymmetry
leading to adverse selection and moral hazard
externality
Positive externalities: spillover benefit, others benefit from economic activities
Negative externalities: spillover costs, others suffer losses from economic activities
Lack of competition
social goals
Provide goods that are in short supply
For example, providing infrastructure
stipulate corporate regulatory obligations
If inclusive insurance is launched
Regulatory type
financial market regulation
to the market
To the institution
business regulation
Intellectual Property and Business Competition
antitrust regulation
Regulators
government regulatory agencies
government departments
Independent regulator: authorized by the government, not affected by the government, autonomous, and financially independent
self-regulatory body
Private non-profit organization without legal authority
Special industry self-regulatory organizations are called self-regulatory organizations, SROs, and are authorized to have certain enforcement power.
state-backed regulations
According to the formulation subject
Statutes: enacted by the legislative body
Administrative regulation/laws: set by the government or other regulators
Judicial law: courts make precedents and interpretations
According to content
substantive lawsubstantive law
Constitution, criminal law, civil law, etc.
procedural law procedural law
Criminal Procedure Law, Civil Procedure Law, Administrative Procedure Law, etc.
regulatory relevance
Regulatory capture theory: Regulators may be influenced by the industry, such as by referring to experts’ opinions on the industry
regulatory competition
Tibet tax incentives
regulatory arbitrage
Go to Tibet to register a company
regulatory tools
Price mechanism: tax or subsidy
Regulatory Requirements and Regulatory Controls: Must Dos and Don’ts
Providing public goods: medical care, education, infrastructure
Investing in private projects: e.g. providing guarantees
regulatory analysis
cost benefit analysis
regulatory burden
net regulatory burden
The difference between private sector regulatory costs and regulatory benefits
Unanticipated costs
Sunset clause: The expiration date forces regulators to conduct a cost-benefit analysis of the regulatory system.
Analysis methods: retrospective analysis retrospective & forward-looking analysis prospective
Regulatory Impact Analysis
Assess the potential for regulatory changes
Impact on specific industries
income
cost
business risk