Terms in this set (9)
What does the Foreign Exchange Market Efficiency Condition say?
If CIP and UIP hold simultaneously, F=S(e) and people are indifferent about using forward contracts to hedge, ceteris paribus.
What are two reasons why the FEMEC does not hold?
1. Country risk differences
2. Formation of S(e) may be biased
A deviation from UIP where the expected change in S - (r-r
) <> 0 such that the holder of a domestic bond can anticipate earning a higher return by saving at r
and converting to the domestic currency after it depreciates
The relationship among yields on financial instruments with differing risks, liquidity, and tax characteristics but same terms to maturity.
Term structure of interest rates
The relationship among yields on financial instruments with identical risk, liquidity, and tax characteristics but differing terms to maturity.
A chart giving the relationship among yields on bonds that differ only in their terms to maturity.
Segmented markets theory
a theory of term structure of interest rates that views bonds with differing maturities as non substitutable, so that their yields differ because they are determined in separate markets
Problem: Does not explain why yield curves generally slope upward)
A theory of the term structure of interest reates that views bonds with differing maturities as perfect substitutes, causing their yields to differ solely because traders anticipated that short-term interest rates will rise or fall.
Example: one period instrument over two periods with r1 and r2(e) versus two period instrument over two years with I
Problem: this theory says that the field curve slopes up only if people expect higher future interest rates
Preferred Habitat Theory
Ceteris paribus, people prefer shorter-term instruments viewed as more liquid.
Add term premium onto I (the average of the two one-period rates)
OTHER SETS BY THIS CREATOR
SPA 3356 Final
Names and Authors w/ Country
A la deriva