1. What is the difference between direct quote and indirect quote of foreign exchange? 2. What...

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1. What is the difference between direct quote and indirect quote of foreign exchange? 2. What is a vehicle currency? What currency currently serves as the world's primary vehicle currency? 3. What is a floating exchange rate system? Compared with other exchange rate systems, is it most or least difficult to quantify the risk of a currency in floating exchange rate system? Why? 4. What are bid and ask rates of currencies? Why are the bid-ask spreads larger in the forward market than in the spot market? 5. Suppose covered interest rate parity holds. When the US dollar interest rates are higher than the euro interest rates, is the euro selling at a premium or discount relative to the USD in the forward market? Why? 6. What would be the logical reasons to use a synthetic forward contract to hedge? 7. What is the unbiasedness hypothesis? How is it related to the interest rate parities? 8. Discuss the differences between systematic risk and idiosyncratic risk. Also given an example for each type of risk. 9. What does the "carry trade" term mean? 10. You want to test uncovered interest rate parity (UIRP) and run the following regression: [S(t+1)- S(t)] S(t) [F(t) = S(t)] 15-5(t)] = b[F(t) = a + b S(t) + e(t + 1), where S(t) is the time-t directly quoted spot exchange rate, and F(t) is the one-period directly quoted forward exchange rate, known at time-t, and e is the error term. Under UIRP, what are your null hypotheses (i.e., under what parameter values, statistically, will you conclude that UIRP holds)? Do the data support UIRP empirically? 1. What is the difference between direct quote and indirect quote of foreign exchange? 2. What is a vehicle currency? What currency currently serves as the world's primary vehicle currency? 3. What is a floating exchange rate system? Compared with other exchange rate systems, is it most or least difficult to quantify the risk of a currency in floating exchange rate system? Why? 4. What are bid and ask rates of currencies? Why are the bid-ask spreads larger in the forward market than in the spot market? 5. Suppose covered interest rate parity holds. When the US dollar interest rates are higher than the euro interest rates, is the euro selling at a premium or discount relative to the USD in the forward market? Why? 6. What would be the logical reasons to use a synthetic forward contract to hedge? 7. What is the unbiasedness hypothesis? How is it related to the interest rate parities? 8. Discuss the differences between systematic risk and idiosyncratic risk. Also given an example for each type of risk. 9. What does the "carry trade" term mean? 10. You want to test uncovered interest rate parity (UIRP) and run the following regression: [S(t+1)- S(t)] S(t) [F(t) = S(t)] 15-5(t)] = b[F(t) = a + b S(t) + e(t + 1), where S(t) is the time-t directly quoted spot exchange rate, and F(t) is the one-period directly quoted forward exchange rate, known at time-t, and e is the error term. Under UIRP, what are your null hypotheses (i.e., under what parameter values, statistically, will you conclude that UIRP holds)? Do the data support UIRP empirically?

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1 Direct quotes and indirect quotes are two ways of quoting exchange rates Under the direct quote the domestic currency is quoted per unit of foreign currency Example if 1 USD 085 EUR this is a direct ... View the full answer