FIN415 / INB 415 Class Web Page, Spring ' 21

Instructor: Maggie Foley, DCOB #263

Jacksonville University


The Syllabus 


Term Project Part I Part II


Weekly SCHEDULE, LINKS, FILES and Questions


Coverage, HW, Supplements

-        Required



Live Stream web link


Tuesday: blackboard collaborate course room


Thursday: blackboard collaborate course room


Saturday office hour 5pm 6pm



Tuesday - Group 1 in classroom Thursday - Group 2 in classroom

1/26 (Video) syllabus, set up market watch game

1/28 (Video) review of 2020, multilateral vs. bilateral, gold $ exercise

2/2 (Video) - BOP, current account, capital account

2/4 (Video) Trade war, US currency history, gold standard

2/9 (Video) - , gold standard, bitcoin, global financial hub

2/11 (Video) global financial hub, Brexit impact

2/16 (Video) - fixed and floating exchange rate, currency quotes, bid ask spread

2/18 (Video) - currency quotes exercises; negative interest rate; LIBOR

2/23(Video) - Euro dollar, Euro Bond, Currency valuation factors, supply and demand curve

2/25 (Video) determinants of US$

3/2 (Video) Will $ collapse? Arbitrage with exchange rate gap

3/4 (Video) First Mid Term Exam, homework due


First Mid Term Exam on Thursday (3/4/2021) starting at 1:00 pm on blackboard collaborate under First Mid Term Exam Folder in the left column (36 multiple choice questions)


3/9 (Video) - Futures and forward contracts in FX market

3/11 (Video) call and put options, payoff, profit calculation

3/16 (Video) call and put options, payoff, profit calculation

3/18 (Video) - call and put options in class exercise, specification

3/23(Video) - currency carry trade, Lira crisis, Bitcoin (Rahaf)

3/25 (Video) locational arbitrage, triangular arbitrage

3/30 (Video) - interest rate parity, Indonesian currency (Milton)

4/1 (Video) interest rate parity exercise, term project excel session

4/6 (Video) second mid term review

4/8 (Video) second mid term exam on blackboard under second mid term exam folder (36 multiple choice questions) and homework due

4/13(Video) - purchasing power parity

4/15 (Video) international fishers effect

4/20 (Video) chapter 11 transactional hedge

4/22 (Video) - chapter 11 transactional hedge, chapter 11 homework review

4/27 (Video) - chapter 18, interest rate swap, plain vanilla swap, term project Q&A

4/29 (Video) Final exam review (Study Guide posted on blackboard as well)


       Final Exam in finals week, on blackboard, under final exam folder, 30 questions (multiple choices, T/F)

TR 1:30 p.m.

Tuesday, May 4

Start at 12pm


       Term project due

       Homework due






Marketwatch Stock Trading Game (Pass code: havefun)

Use the information and directions below to join the game.

1.     URL for your game:


2.   Password for this private game: havefun

3.     Click on the 'Join Now' button to get started.

4.     If you are an existing MarketWatch member, login. If you are a new user, follow the link for a Free account - it's easy!

5.     Follow the instructions and start trading!


Discussion: How to pick stocks (

Daily earning announcement:

IPO schedule:

First Name

Last Name

Group 1 - Tuesday

Group 2 - Thursday





Bala Krishnan













































Topic 1: 2020 Review (from


The impact of COVID-19 has drawn numerous comparisons some to the Global Financial crisis of 20072008, others to World War II, and more still to crises we know only from history books. The full scale of the pandemic will only be known in years to come, as we collect and analyze the data, adapt and evolve our financing to meet countries needs, and continue our work to end extreme poverty and promote shared prosperity.

For class discussion:

        Do you think that the Covid-19 crisis is a temporary shock, or a permanent one?

        How soon can we recover from this crisis?

        Comparing with financial crisis of 2008, which one is more severe?


Accelerated Economic Downturn

Those restrictions enacted to control the spread of the virus, and thus alleviate pressure on strained and vulnerable health systems have had an enormous impact on economic growth. The June edition of the Global Economic Prospects, put it plainly: COVID-19 has triggered a global crisis like no other a global health crisis that, in addition to an enormous human toll, is leading to the deepest global recession since the Second World War. It forecast that the global economy as well as per capita incomes would shrink this year pushing millions into extreme poverty.


Relieving the Debt Burden

This economic fallout is hampering countries ability to respond effectively to the pandemics health and economic effects. Even before the spread of COVID-19, almost half of all low-income countries were already in debt distress or at a high risk of it , leaving them with little fiscal room to help the poor and vulnerable who were hit hardest.

For this reason, in April, the World Bank and IMF called for the suspension of debt-service payments for the poorest countries to allow them to focus resources on fighting the pandemic. The Debt Service Suspension Initiative (DSSI) has enabled these countries to free-up billions of dollars for their COVID-19 response. Yet, as the graph below illustrates, debt service outlays to bilateral creditors will impose a heavy burden for years to come, and quick action to reduce debt will be needed to avoid another lost decade.

Impact on Businesses and Jobs

The pandemic slowdown has deeply impacted businesses and jobs.  Around the world, companies especially micro, small, and medium enterprises (MSMEs) in the developing world are under intense strain, with more than half either in arrears or likely to fall into arrears shortly. To understand the pressure that COVID-19 is having on firms performance as well as the adjustments they are having to make, the World Bank and partners have been conducting rapid COVID-19 Business Pulse Surveys in partnership with client governments.

These offer a glimmer of good news. Responses collected between May and August showed that many of these firms were retaining staff, hoping to keep them on board as they ride out the downturn. More than a third of companies have increased the use of digital technology to adapt to the crisis.  The same data warned, however, that the firms sales have dropped by half amid the crisis, forcing companies to reduce hours and wages, and most businesses especially micro and small firms in low-income countries are struggling to access public support.




Watch this video on Netflix Death to 2020

From IMF website, as of April 2020


Topic 2: Multilateral Trade vs. Bilateral Trade


What is MULTILATERALISM? What does MULTILATERALISM mean? MULTILATERALISM meaning & explanation (youtube)


What is BILATERAL TRADE? What does BILATERAL TRADE mean? BILATERAL TRADE meaning & explanation (youtube)


Take away:


         Multilateral trade agreements strengthen the global economy by making developing countries competitive. 

         They standardize import and export procedures giving economic benefits to all member nations. 

         Their complexity helps those that can take advantage of globalization, while those who cannot often face hardships.


For class discussion: Do you agree with the above points? Why or why not?


Multilateral Trade Agreements With Their Pros, Cons and Examples

5 Pros and 4 Cons to the World's Largest Trade Agreements







Updated October 28, 2020

Multilateral trade agreements are commerce treaties among three or more nations. The agreements reduce tariffs and make it easier for businesses to import and export. Since they are among many countries, they are difficult to negotiate

That same broad scope makes them more robust than other types of trade agreements once all parties sign. 

Bilateral agreements are easier to negotiate but these are only between two countries. They don't have as big an impact on economic growth as does a multilateral agreement.

5 Advantages

         Multilateral agreements make all signatories treat each other equally. No country can give better trade deals to one country than it does to another. That levels the playing field. It's especially critical for emerging market countries. Many of them are smaller in size, making them less competitive. The Most Favored Nation Status confers the best trading terms a nation can get from a trading partner. Developing countries benefit the most from this trading status.

         The second benefit is that it increases trade for every participant. Their companies enjoy low tariffs. That makes their exports cheaper.

         The third benefit is it standardizes commerce regulations for all the trade partners. Companies save legal costs since they follow the same rules for each country.

         The fourth benefit is that countries can negotiate trade deals with more than one country at a time. Trade agreements undergo a detailed approval process. Most countries would prefer to get one agreement ratified covering many countries at once. 

         The fifth benefit applies to emerging markets. Bilateral trade agreements tend to favor the country with the best economy. That puts the weaker nation at a disadvantage. But making emerging markets stronger helps the developed economy over time.

As those emerging markets become developed, their middle class population increases. That creates new affluent customers for everyone.

4 Disadvantages

         The biggest disadvantage of multilateral agreements is that they are complex. That makes them difficult and time consuming to negotiate. Sometimes the length of negotiation means it won't take place at all. 

         Second, the details of the negotiations are particular to trade and business practices. The public often misunderstands them. As a result, they receive lots of press, controversy, and protests

         The third disadvantage is common to any trade agreement. Some companies and regions of the country suffer when trade borders disappear.

         The fourth disadvantage falls on a country's small businesses. A multilateral agreement gives a competitive advantage to giant multi-nationals. They are already familiar with operating in a global environment. As a result, the small firms can't compete. They lay off workers to cut costs. Others move their factories to countries with a lower standard of living. If a region depended on that industry, it would experience high unemployment rates. That makes multilateral agreements unpopular.


  • Treats all member nations equally.
  • Makes international trading easier.
  • Trade regulations are the same for everyone.
  • Helps emerging markets.
  • Multiple nations are covered by one treaty.


  • Negotiations can be lengthy, risk breaking down.
  • Easily misunderstood by the public
  • Removing trade borders affects businesses.
  • Benefits large corporations, but not small businesses.


Some regional trade agreements are multilateral. The largest had been the North American Free Trade Agreement (NAFTA), which was ratified on January 1, 1994. NAFTA quadrupled trade between the United States, Canada, and Mexico from its 1993 level to 2018. On July 1, 2020, the U.S.-Mexico-Canada Agreement (USMCA) went into effect. The USMCA was a new trade agreement between the three countries that was negotiated under President Donald Trump.

The Central American-Dominican Republic Free Trade Agreement was signed on August 5, 2004. CAFTA-DR eliminated tariffs on more than 80% of U.S. exports to six countries: Costa Rica, the Dominican Republic, Guatemala, Honduras, Nicaragua, and El Salvador. As of November 2019, it had increased trade by 104%, from $2.44 billion in January 2005 to $4.97 billion.

The Trans-Pacific Partnership would have been bigger than NAFTA. Negotiations concluded on October 4, 2015. After becoming president, Donald Trump withdrew from the agreement. He promised to replace it with bilateral agreements. The TPP was between the United States and 11 other countries bordering the Pacific Ocean. It would have removed tariffs and standardized business practices.

All global trade agreements are multilateral. The most successful one is the General Agreement on Trade and Tariffs. Twenty-three countries signed GATT in 1947. Its goal was to reduce tariffs and other trade barriers.

In September 1986, the Uruguay Round began in Punta del Este, Uruguay. It centered on extending trade agreements to several new areas. These included services and intellectual property. It also improved trade in agriculture and textiles. The Uruguay Round led to the creation of the World Trade Organization. On April 15, 1994, the 123 participating governments signed the agreement creating the WTO in Marrakesh, Morocco. The WTO assumed management of future global multilateral negotiations.

The WTO's first project was the Doha round of trade agreements in 2001. That was a multilateral trade agreement among all WTO members. Developing countries would allow imports of financial services, particularly banking. In so doing, they would have to modernize their markets. In return, the developed countries would reduce farm subsidies. That would boost the growth of developing countries that were good at producing food.

Farm lobbies in the United States and the European Union doomed Doha negotiations. They refused to agree to lower subsidies or accept increased foreign competition. The WTO abandoned the Doha round in July 2008.

On December 7, 2013, WTO representatives agreed to the so-called Bali package. All countries agreed to streamline customs standards and reduce red tape to expedite trade flows. Food security is an issue. India wants to subsidize food so it could stockpile it to distribute in case of famine. Other countries worry that India may dump the cheap food in the global market to gain market share. 

Rust Belt


Updated Aug 25, 2020


What Is the Rust Belt?

The Rust Belt is a colloquial term used to describe the geographic region stretching from New York through the Midwest that was once dominated by the coal industry, steel production, and manufacturing. The Rust Belt became an industrial hub due to its proximity to the Great Lakes, canals, and rivers, which allowed companies to access raw materials and ship out finished products.

The region received the name Rust Belt in the late 1970s, after a sharp decline in industrial work left many factories abandoned and desolate, causing increased rust from exposure to the elements. It is also referred to as the Manufacturing Belt and the Factory Belt.


  • The Rust Belt refers to the geographic region from New York through the Midwest that was once dominated by manufacturing.
  • The Rust Belt is synonymous with regions facing industrial decline and abandoned factories rusted from exposure to the elements.
  • The Rust Belt was home to thousands of blue-collar jobs in coal plants, steel and automotive production, and the weapons industry.

Understanding the Rust Belt

The term Rust Belt is often used in a derogatory sense to describe parts of the country that have seen an economic declinetypically very drastic. The rust belt region represents the deindustrialization of an area, which is often accompanied by fewer high-paying jobs and high poverty rates. The result has been a change in the urban landscape as the local population has moved to other areas of the country in search of work.

Although there is no definitive boundary, the states that are considered in the Rust Beltat least partlyinclude the following:

  • Indiana
  • Illinois
  • Michigan
  • Missouri
  • New York; Upstate and western regions
  • Ohio
  • Pennsylvania
  • West Virginia
  • Wisconsin

There are other states in the U.S. that have also experienced declines in manufacturing, such as states in the deep south, but they are not usually considered part of the Rust Belt. The region was home to some of America's most prominent industries, such as steel production and automobile manufacturing. Once recognized as the industrial heartland, the region has experienced a sharp downturn in industrial activity from the increased cost of domestic labor, competition from overseas, technology advancements replacing workers, and the capital intensive nature of manufacturing.

Poverty in the Rust Belt

Blue-collar jobs have increasingly moved overseas, forcing local governments to rethink the type of manufacturing businesses that can succeed in the area. While some cities managed to adopt new technologies, others still struggle with rising poverty levels and declining populations.

Below are the poverty rates from the U.S. Census Bureau as of 2018 for each of the Rust Belt states listed above.

Poverty Rates in the Rust Belt. Investopedia 

There are other U.S. states that have high poverty rates, such as Kentucky (16.9%), Louisiana (18.6%), and Alabama (16.8%). However, the rust belt states haveat a minimuma double-digit percentage of their population in poverty.1

History of the Rust Belt

Before being known as the Rust Belt, the area was generally known as the country's Factory, Steel, or Manufacturing Belt. This area, once a booming hub of economic activity, represented a great portion of U.S. industrial growth and development.

The natural resources that were found in the area led to its prosperitynamely coal and iron orealong with labor and ready access to transport by available waterways. This led to the rise in coal and steel plants, which later spawned the weapons, automotive, and auto parts industries. People seeking employment began moving to the area, which was dominated by both the coal and steel industries, changing the overall landscape of the region.

But that began to change between the 1950s and 1970s. Many manufacturers were still using expensive and outdated equipment and machinery and were saddled with the high costs of domestic labor and materials. To compensate, a good portion of them began looking elsewhere for cheaper steel and labornamely from foreign sourceswhich would ultimately lead to the collapse of the region.


There is no definitive boundary for the Rust Belt, but it generally includes the area from New York through the Midwest.

Decline of the Rust Belt

Most research suggests the Rust Belt started to falter in the late 1970s, but the decline may have started earlier, notably in the 1950s, when the region's dominant industries faced minimal competition. Powerful labor unions in the automotive and steel manufacturing sectors ensured labor competition stayed to a minimum. As a result, many of the established companies had very little incentive to innovate or expand productivity. This came back to haunt the region when the United States opened trade overseas and shifted manufacturing production to the south.

By the 1980s, the Rust Belt faced competitive pressuredomestically and overseasand had to ratchet down wages and prices. Operating in a monopolistic fashion for an extended period of time played an instrumental role in the downfall of the Rust Belt. This shows that competitive pressure in productivity and labor markets are important to incentivize firms to innovate. However, when those incentives are weak, it can drive resources to more prosperous regions of the country.

The region's population also showed a rapid decline. What was once a hub for immigrants from the rest of the country and abroad, led to an exodus of people out of the area. Thousands of well-paying blue-collar jobs were eliminated, forcing people to move away in search of employment and better living conditions.

Politics and the Rust Belt

The term Rust Belt is generally attributed to Walter Mondale, who referred to this part of the country when he was the Democratic presidential candidate in 1984. Attacking President Ronald Reagan, Mondale claimed his opponent's policies were ruining what he called the Rust Bowl. He was misquoted by the media as saying the rust belt, and the term stuck. Since then, the term has consistently been used to describe the area's economic decline.

From a policy perspective, addressing the specific needs of the Rust Belt states was a political imperative for both parties during the 2016 election. Many believe the national government can find a solution to help this failing region succeed again.



Part II In class exercise convert currencies back and forth

If the dollar is pegged to gold at US $1800 = 1 ounce of gold and the British pound is pegged to gold at 1200 = 1 ounce of gold. What should be the exchange rate between US$ and British ? How much can you make without any risk if the exchange rate is 1 = 2$? Assume that your initial investment is $1800. What about the exchange rate set at 1 = 1.2$? What about your initial investment is 1200?



1 = 2$ (note that the exchange rate is set at 1 = 1.5$ since $1800 = 1500=1 ounce of gold $1.5=1).

With $1800, you can buy 1 ounce of gold at US $1800 = 1 ounce of gold. With one ounce of gold, you can sell it in UK at 1200 = 1 ounce of gold, so you can get back 1200 convert to $ at $2=1 as given get back 1200 * 2$/ = $2400 > $1800, initial investment you could make a profit of $600 ($2400 - $1800=$600) Yes.


1 = 1.2$ (note that the exchange rate is set at 1 = 1.5$ since $1800 = 1500=1 ounce of gold $1.5=1).

With $1800, you can buy either 1 ounce of gold at US $1800 = 1 ounce of gold. With one ounce of gold, you can sell it in UK at 1200 = 1 ounce of gold, so you can get back 1200 convert to $ at $1.2=1 as given get back 1200 * 1.2$/ = $1440 < $1800 you will lose $360 ($1440 - $1800=$-360) No.

So should convert to first and then buy gold in UK With $1800, you can convert to 1500 ($1800 / (1.2$/ = 1500 ). buy gold in UK at 1200 = 1 ounce of gold, so you can get back 1500/1200 = 1.25 ounce of gold Sell gold in US at US $1800 = 1 ounce of gold So get back 1.25 ounce of gold * $1800 = $2250 > $1800 you will make a profit of $450 ($2250 - $1800=$450) Yes.

Homework (due with first midterm exam)


1.  If the dollar is pegged to gold at US $1800 = 1 ounce of gold and the British pound is pegged to gold at 1500 = 1 ounce of gold. What should be the exchange rate between US$ and Euro ? How much can you make without any risk if the exchange rate is 1 = 1.5$? Assume that your initial investment is $1800. (answer: $1.2/euro, $450)

2.  Multilateral trade vs. bilateral trade: Which side do you support? Why?


Chapter 2


Chapter 2 (PPT)


Lets watch this video together.

Imports, Exports, and Exchange Rates: Crash Course Economics #15


     Topic 1- What is BOP?

The balance of payment of a country contains two accounts: current and capital. The current account records exports and imports of goods and services as well as unilateral transfers, whereas the capital account records purchase and sale transactions of foreign assets and liabilities during a particular year.


         What is the current account?

Balance of payments: Current account (video, Khan academy)


As the name implies, the current account considers goods and services currently being produced.

The current account deals with short-term transactions known as actual transactions, as they have a real impact on income, output and employment levels of a country through the movement of goods and services in the economy. It consists of visible trade (export and import of goods), invisible trade (export and import of services), unilateral transfers, and investment income (income from factors such as land or foreign shares). The credit and debit of foreign exchangedue to these transactions are also recorded in the balance of current account. The resulting balance of the current account is approximated as the sum total of balance of trade.

3rd quarter 2019:

-$124.1 billion

2nd quarter 2019:

-$125.2 billion

The U.S. current account deficit narrowed by $1.1 billion, or 0.9 percent, to $124.1 billion in the third quarter of 2019, according to statistics from the U.S. Bureau of Economic Analysis. The revised second quarter deficit was $125.2 billion. The third quarter deficit was 2.3 percent of current dollar gross domestic product, down less than 0.1 percent from the second quarter.


Q3 2020


Q2 2020


The U.S. current account deficit widened by $17.2 billion, or 10.6 percent, to $178.5 billion in the third quarter of 2020, according to statistics released by the U.S. Bureau of Economic Analysis. The revised second quarter deficit was $161.4 billion. The third quarter deficit was 3.4 percent of current dollar gross domestic product, up from 3.3 percent in the second quarter.



For Details, please read the following article.



EMBARGOED UNTIL RELEASE AT 8:30 A.M. EST, Friday, December 18, 2020

BEA 20-66

U.S. International Transactions, Third Quarter 2020

Current Account Deficit Widens by 10.6 Percent in Third Quarter

Current Account Balance, Third Quarter

The U.S. current account deficit, which reflects the combined balances on trade in goods and services and income flows between U.S. residents and residents of other countries, widened by $17.2 billion, or 10.6 percent, to $178.5 billion in the third quarter of 2020, according to statistics released by the U.S. Bureau of Economic Analysis. The revised second quarter deficit was $161.4 billion.

The third quarter deficit was 3.4 percent of current dollar gross domestic product, up from 3.3 percent in the second quarter.

The $17.2 billion widening of the current account deficit in the third quarter mostly reflected an expanded deficit on goods that was partly offset by an expanded surplus on primary income.


Coronavirus (COVID-19) Impact on Third Quarter 2020 International Transactions

All major categories of current account transactions increased in the third quarter of 2020 following notable declines in the second quarter, reflecting the resumption of trade and other business activities that were postponed or restricted due to COVID-19. In the financial account, most of the currency swaps between the U.S. Federal Reserve System and foreign central banks that remained at the end of the second quarter were ended in the third quarter, contributing to the continued U.S. withdrawal of deposit assets abroad and the continued U.S. repayment of deposit and loan liabilities. A record level of net shipments of U.S. currency abroad to meet the demand for U.S. currency by foreign residents increased U.S. currency liabilities, partly offsetting the net repayment of U.S. deposit liabilities. The full economic effects of the COVID-19 pandemic cannot be quantified in the statistics because the impacts are generally embedded in source data and cannot be separately identified. For more information on the impact of COVID-19 on the statistics, see the technical note that accompanies this release.

Current Account Transactions (tables 1-5)

Exports of goods and services to, and income received from, foreign residents increased $99.4 billion, to $796.0 billion, in the third quarter. Imports of goods and services from, and income paid to, foreign residents increased $116.6 billion, to $974.5 billion.


Trade in Goods (table 2)

Exports of goods increased $68.4 billion, to $357.1 billion, and imports of goods increased $94.4 billion, to $602.7 billion. The increases in both exports and imports reflected increases in all major categories, led by automotive vehicles, parts, and engines, mainly parts and engines and passenger cars.

Trade in Services (table 3)

Exports of services increased $2.8 billion, to $164.8 billion, mainly reflecting an increase in charges for the use of intellectual property, mostly licenses for the use of outcomes of research and development, that was partly offset by a decrease in travel, primarily education-related travel. Imports of services increased $6.5 billion, to $107.7 billion, mainly reflecting increases in charges for the use of intellectual property, mostly licenses for the use of outcomes of research and development; in transport, primarily sea freight transport; and in travel, primarily other personal travel.

Primary Income (table 4)

Receipts of primary income increased $26.8 billion, to $238.7 billion, and payments of primary income increased $11.9 billion, to $190.6 billion. The increases in both receipts and payments mainly reflected increases in direct investment income, primarily earnings.

Secondary Income (table 5)

Receipts of secondary income increased $1.4 billion, to $35.3 billion, reflecting an increase in private transfers, mostly private sector fines and penalties, that was partly offset by a decrease in general government transfers, mainly government sector fines and penalties. Payments of secondary income increased $3.7 billion, to $73.5 billion, reflecting increases in private transfers, primarily private sector fines and penalties, and in general government transfers, mostly international cooperation.

Capital Account Transactions (table 1)

Capital transfer receipts increased $0.3 billion, to $0.4 billion, in the third quarter, reflecting the U.S. Department of States sale of a property in Hong Kong.

Financial Account Transactions (tables 1, 6, 7, and 8)

Net financial account transactions were −$221.1 billion in the third quarter, reflecting net U.S. borrowing from foreign residents.

Financial Assets (tables 1, 6, 7, and 8)

Third quarter transactions decreased U.S. residents foreign financial assets by $73.0 billion. Transactions decreased other investment assets, mostly currency and deposits, by $288.1 billion. Transactions in deposits included a net withdrawal by the U.S. Federal Reserve of $203.0 billion from deposits abroad related to the ending of currency swaps. Transactions increased direct investment assets, mostly equity, by $71.1 billion; portfolio investment assets, mostly equity securities, by $142.2 billion; and reserve assets by $1.8 billion.

Liabilities (tables 1, 6, 7, and 8)

Third quarter transactions increased U.S. liabilities to foreign residents by $172.0 billion. Transactions increased direct investment liabilities, both equity and debt, by $70.5 billion and portfolio investment liabilities, mostly equity securities, by $147.5 billion. Transactions decreased other investment liabilities, mostly loans, by $46.0 billion.

Financial Derivatives (table 1)

Net transactions in financial derivatives were $24.0 billion in the third quarter, reflecting net lending to foreign residents.

Updates to Second Quarter 2020 International Transactions Accounts Balances

Billions of dollars, seasonally adjusted


Preliminary estimate

Revised estimate

Current account balance



    Goods balance



    Services balance



    Primary income balance



    Secondary income balance



Net financial account transactions





         What is the Capital Account

Balance of payments: Capital account (video, Khan Academy)


The capital account is a record of the inflows and outflows of capital that directly affect a nations foreign assets and liabilities. It is concerned with all international trade transactions between citizens of a given country and citizens in other countries. The components of the capital account include foreign investment and loans, banking capital and other forms of capital, as well as monetary movements or changes in the foreign exchange reserve. The capital account flow reflects factors such as commercial borrowings, banking, investments, loans, and capital.

In other words, the capital account is concerned with payments of debts and claims, regardless of the time period. The balance of capital account also includes all items reflecting changes in stocks.




         The Bottom Line

In economic terms, the current account deals with receipt and payment in cash as well as non-capital items, and the capital account reflects sources and utilization of capital. The sum of the current account and capital account as reflected in the balance of payments will always be zero; any surplus or deficit in the current account is matched and canceled out by an equal surplus or deficit in the capital account.



Top Trading Partners - November 2020

Year-to-Date Total Trade





Total Trade

Percent of Total Trade


Total, All Countries






Total, Top 15 Countries




































Korea, South






United Kingdom






















































Topic 2: Trade war with China to reduce trade deficit (current account deficit)


For Class Discussion:

Has the US won the trade war against China? Can trade war help reduce the US current account deficit?


America v China: why the trade war won't end soon | The Economist (youtube)

Has the US lost the trade war with China? (youtube)

US-China trade deficit skyrockets | DW News (youtube)



Chapter 2 part I (Due with first mid term exam)

1.      About the trade war between US and China and the upcoming one between US and Germany, what is your opinion? Can the trade wars help reduce the US current account deficits?

2.      Based on the classroom discussion, and documents posted and available online, do you think that the trade war against China could help US to reduce its trade deficit (or current account deficit)? Please be specific.

3.      Internet exercises (not required, information for intereted students only)

a.      IMF, world bank and UN are only a few of the major organizations that track, report and aid international economic and financial development. Based on information provided in those websites, you could learn about a countrys economic outlook.



      World bank:

      Bank of international settlement:

b.    St. Louis Federal Reserve provides a large amount of recent open economy macroeconomic data online. You can track down BOP and GDP data for the major industrial countries. 

      Recent international economic data: 

      Balance of Payments statistics:

Balance of payments: Current account (video, Khan academy) (FYI)


Balance of payments: Capital account (video, Khan Academy) (FYI)


Current vs. capital accounts: what is the difference (youtube)?



From khan academy


Reference of useful websites for global economy

International Trade Statistics (PDF)


Current Account (BOP) Data World Bank


IMF, world bank and UN are only a few of the major organizations that track, report  and aid international economic and financial development. Using these website, you can summarize the economic outlook for each country.




World bank:

Bank of international settlement:


St. Louis Federal Reserve provides a large amount of recent open economy macroeconomic data online. You can track down BOP and GDP data for the major industrial countries. 


Recent international economic data:




Updated May 5, 2019

Current vs. Capital Accounts: An Overview

The current and capital accounts represent two halves of a nation's balance of payments. The current account represents a country's net income over a period of time, while the capital account records the net change of assets and liabilities during a particular year.

In economic terms, the current account deals with the receipt and payment in cash as well as non-capital items, while the capital account reflects sources and utilization of capital. The sum of the current account and capital account reflected in the balance of payments will always be zero. Any surplus or deficit in the current account is matched and canceled out by an equal surplus or deficit in the capital account.



The current and capital accounts are two components of a nation's balance of payments.

The current account is the difference between a country's savings and investments.

A country's capital account records the net change of assets and liabilities during a certain period of time.


Current Account

The current account deals with a country's short-term transactions or the difference between its savings and investments. These are also referred to as actual transactions (as they have a real impact on income), output and employment levels through the movement of goods and services in the economy.

The current account consists of visible trade (export and import of goods), invisible trade (export and import of services), unilateral transfers, and investment income (income from factors such as land or foreign shares). The credit and debit of foreign exchange from these transactions are also recorded in the balance of the current account. The resulting balance of the current account is approximated as the sum total of the balance of trade.

Transactions are recorded in the current account in the following ways:

Exports are noted as credits in the balance of payments

Imports are recorded as debits in the balance of payments

The current account gives economists and other analysts an idea of how the country is faring economically. The difference between exports and imports, or the trade balance, will determine whether a country's current balance is positive or negative. When it is positive, the current account has a surplus, making the country a "net lender" to the rest of the world. A deficit means the current account balance is negative. In this case, that country is considered a net borrower.

If imports decline and exports increase to stronger economies during a recession, the country's current account deficit drops. But if exports stagnate as imports grow when the economy grows, the current account deficit grows.

Capital Account

The capital account is a record of the inflows and outflows of capital that directly affect a nations foreign assets and liabilities. It is concerned with all international trade transactions between citizens of one country and those in other countries.

The components of the capital account include foreign investment and loans, banking and other forms of capital, as well as monetary movements or changes in the foreign exchange reserve. The capital account flow reflects factors such as commercial borrowings, banking, investments, loans, and capital.

A surplus in the capital account means there is an inflow of money into the country, while a deficit indicates money moving out of the country. In this case, the country may be increasing its foreign holdings.

In other words, the capital account is concerned with payments of debts and claims, regardless of the time period. The balance of the capital account also includes all items reflecting changes in stocks.

The International Monetary Fund divides capital account into two categories: The financial account and the capital account.

The term capital account is also used in accounting. It is a general ledger account used to record the contributed capital of corporate owners as well as their retained earnings. These balances are reported in a balance sheet's shareholder's equity section.













China won the trade war


By Scott Sumner

A year ago, Tyler Cowen claimed that President Trump won round one of the trade war with China:


Im not entirely convinced we won even the first round of the trade war, although the claim might be true.  The stated goal of President Trump and his advisers was to reduce the US trade deficit with China.  A secondary goal may have been to slow the growth of Chinas economy.  A third goal might have been to weaken the position of Xi Jinping, who has been moving China in a more repressive and nationalistic direction.

Today, we know that the US failed spectacularly on all three counts.  Indeed the last year has been an unmitigated disaster for Trump administration protectionists.  Todays Bloomberg has an article arguing (correctly) that China ended up winning the trade war:


The trade deficit has risen to record levels in 2020:




The goal of slowing the rise of the Chinese economy has also failed.  The Chinese economy (in dollar terms) is now expected to overtake the US in 2028, five years earlier than estimated just a year ago.  (In PPP terms they overtook us years ago.)

And the prestige of Xi Jinping has risen dramatically relative to the prestige of President Trump, even before the recent fiasco on Capitol Hill.  In China theres a widespread view that our botched handling of Covid-19 shows the superiority of an authoritarian system, at least on questions of public health.  (Thats not my view, as Taiwan did better than China.)  The prestige of America has never been lower.

Heres what Tyler said a year ago:

A third set of possible benefits relates to the internal power dynamics in the Chinese Communist Party. For all the talk of his growing power, Chinese President Xi Jinping has not been having a good year. The situation in Hong Kong remains volatile, the election in Taiwan did not go the way the Chinese leadership had hoped, and now the trade war with America has ended, or perhaps more accurately paused, in ways that could limit Chinas future expansion and international leverage. This trade deal takes Xi down a notch, not only because it imposes a lot of requirements on China, such as buying American goods, but because it shows China is susceptible to foreign threats. . . .

It is too soon to judge the current trade deal a success from an American point of view. Nevertheless, its potential benefits remain underappreciated, and there is a good chance they will pay off.

Its no longer too soon to judge.  Perhaps without Covid-19 the outcome would have been more favorable to the US, but as of today the trade war looks like an own goal for the US.  The correct policy would have been to join the TPP back in 2017.  And increase high skilled immigration from China (including Hong Kong.) Lets hope the Biden Administration learns the right lessons.


Khan Academys view of the trade deficit with China (video)


Part II of Chapter 2 --- Evolution of international monetary system

Finance: The History of Money (combined) (video, fan to watch)

Review of history of money: A brief history of money - From gold to bitcoin and cryptocurrencies (video)

         Bimetallism: Before 1875

         Classical Gold Standard: 1875-1914

The Gold Standard Explained in One Minute (video)

  International value of currency was determined by its fixed relationship to gold.

  Gold was used to settle international accounts, so the risk of trading with other countries could be reduced.

         Interwar Period: 1915-1944

  Countries suspended gold standard during the WWI, to increase money supply and pay for the war.

  Countries relied on a partial gold standard and partly other countries currencies during the WWII

         Bretton Woods System: 1945-1972

The Bretton Woods Monetary System (1944 - 1971) Explained in One Minute (video)

  All currencies were pegged to US$.

  US$ was the only currency that was backed by gold.

  US$ was world currency at that time.

         The Flexible Exchange Rate Regime: 1973-Present



For class discussion:

Do you support returning to gold standard?


The Evolution of US Currency


At times, America may not be the most popular nation in the world, but one thing is for sure: it is famous for its green. The greenback has been iconic since its inception.

This infographic above misses a few key instances in US currency history namely the birth of the Federal Reserve in 1913 and Nixon ending convertibility to gold in 1971. Both events were catalysts to massive money printing which leaves the USD with only a fraction of the purchasing power that it once had.




Feds Powell explains why a return to the gold standard would be so damaging to the economy

JUL 10 2019

Thomas Franck@TOMWFRANCK


If you assigned us [to] stabilize the dollar price of gold, monetary policy could do that, but the other things would fluctuate, and we wouldnt care, Powell says.

Though Powell distanced himself from the Fed nomination process, his comments put him at odds with the writings of Judy Shelton, a current nominee to the central bank.


Federal Reserve Chairman Jerome Powell told Congress on Wednesday that he doesnt think a return to the gold standard in the U.S. would be a good idea.

Youve assigned us the job of two direct, real economy objectives: maximum employment, stable prices. If you assigned us [to] stabilize the dollar price of gold, monetary policy could do that, but the other things would fluctuate, and we wouldnt care, Powell said from Capitol Hill. We wouldnt care if unemployment went up or down. That wouldnt be our job anymore.

There have been plenty of times in fairly recent history where the price of gold has sent a signal that would be quite negative for either of those goals, he said. No other country uses it, he added. The Fed is tasked and overseen by Congress to maximize employment and keep prices stable.

Though Powell was quick to distance himself from the Fed nomination process, his comments on the gold standard put him at odds with the writings of Judy Shelton, a current Fed nominee and advocate for monetary policy reforms.

Shelton, who was tapped last week by President Donald Trump to join the Feds board, has written that a return to the gold standard affords the U.S. an opportunity to secure continued prominence in global monetary affairs.

If the appeal of cryptocurrencies is their capacity to provide a common currency, and to maintain a uniform value for every issued unit, we need only consult historical experience to ascertain that these same qualities were achieved through the classical international gold standard, she wrote in 2018.

The U.S. first severed the dollar from gold during the Great Depression of the 1930s, when then-president Franklin Roosevelt cut the greenbacks ties with gold, allowing the government to issue more money and lower interest rates. The U.S. allowed foreign governments to trade dollars for gold until President Richard Nixon abolished the policy in 1971.

The choice of Shelton may hint at Trumps frustration with Fed leaders and the direction of the central banks monetary policy. Trump has argued that higher interest rates and so-called quantitative tightening have capped GDP growth and dampened the U.S. position in trade negotiations with China.



Mar 27, 2020,04:54pm EDT|30,167 views

What If We Had A Gold Standard System, Right Now?

Nathan LewisContributor

For most of the 182 years between 1789 and 1971, the United States embraced the principle of a dollar linked to gold at first, at $20.67/oz., and then, after 1933, $35/oz. Nearly every economist today will tell you that was a terrible policy. We can tell it was a disaster because, during that time, the United States became the wealthiest and most prosperous country in the history of the world.

This is economist logic.

But, even if some economists might agree with the general principle, they might be particularly hesitant to apply such monetary discipline right now, in the midst of economic and financial turmoil. This kind of event is the whole reason why we put up with all the chronic difficulties of floating currencies, and economic manipulation by central banks. Isn't it?

So, let's ask: What if we were on a gold standard system, right now? Or, to be a little more specific, what if we had been on a gold standard system for the last ten years, and continued on one right now, in the midst of the COVID-19 panic and economic turmoil?

In the end, a gold standard system is just a fixed-value system. The International Monetary Fund tells us that more than half the countries in the world, today, have some kind of fixed-value system they link the value of their currency to some external standard, typically the dollar, euro, or some other international currency. They have fixed exchange rates, compared to this external benchmark. The best of these systems are currency boards, such as is used by Hong Kong vs. the U.S. dollar, or Bulgaria vs. the euro.

If you think of a gold standard as just a "currency board linked to gold," you would have the general idea. These currency boards are functioning right now to keep monetary stability in the midst of a lot of other turmoil. If you had all the problems of today, plus additional monetary instability as Russia or Turkey or Korea has been experiencing (or the euro ...), it just piles more problems on top of each other.

Actually, it would probably be easier to link to gold than the dollar or euro, because gold's value tends to be stable, while the floating fiat dollar and euro obviously have floating values, by design. If you are going to link your currency to something, it is easier to link it to something that moves little, rather than something that moves a lot. Big dollar moves, such as in 1982, 1985, 1997-98 and 2008, tend to be accompanied by currency turmoil around the world.

But, even within the discipline of a gold standard system, you could still have a fair amount of leeway regarding central bank activity, and also various financial supports that arise via the Treasury and Congress.

Basically, you could do just about anything that is compatible with keeping the value of the dollar stable vs. gold.

In the pre-1914 era, there was a suite of policies to this effect, generally known as the "lender of last resort," and described in Walter Bagehot's book Lombard Street (1873). Another set of solutions resolved the Panic of 1907, without ever leaving the gold standard. The Federal Reserve was explicitly designed to operate on a gold standard system; and mostly did so for the first 58 years of its existence, until 1971. Others have argued that a functional "free banking" system, as Canada had in the pre-1914 era, would allow private banks to take on a lot of these functions, without the need for a central bank to do so.

What could the Federal Reserve do today, while still adhering to the gold standard?

First: It could expand the monetary base, by any amount necessary, that meets an increase in demand to hold cash (base money). Quite commonly, when things get dicey, people want to hold more cash. Individuals might withdraw banknotes from banks. Banks themselves tend to hold more "bank reserves" (deposits) at the Federal Reserve the banker's equivalent of a safe full of banknotes. This has happened, for example, during every major war. During the Great Depression, the Federal Reserve expanded its balance sheet by a huge amount, as banks increased their bank reserve holdings in the face of uncertainty. Nevertheless, the dollar's value remained at its $35/oz. parity.

fed liabilities

Federal Reserve Liabilities 1917-1941.


Second: The Federal Reserve could extend loans to certain entities - banks, or corporations - as long as this lending is consistent with the maintenance of the currency's value at its gold parity. In the pre-1914 era, this was done via the "discount window." One way this could come about is by swapping government debt for direct lending. For example, the Federal Reserve could extend $1.0 trillion of loans to banks and corporations, and also reduce its Treasury bond holdings by $1.0 trillion. This would not expand the monetary base. But, it might do a lot to help corporations with funding issues.

What the Federal Reserve would not be able to do is: expand the "money supply" (monetary base) to an excessive amount an amount that tended to cause the currency's value to fall due to oversupply, compared to its gold parity.

Now we come to a wide variety of actions that are not really related to the Federal Reserve, but rather, to the Treasury and Congress.

In 1933, a big change was Deposit Insurance. The Federal Government insured bank accounts. It helped stop a banking panic at the time. This is a controversial policy even today, and some think it exacerbated the Savings and Loan Crisis of the 1980s, not to mention more issues in 2008. But, nevertheless, it didn't have anything to do with the Federal Reserve.

In 2009, the stock market bottomed when there was a rule change that allowed banks to "mark to model" rather than "mark to market." Banks could just say: "We are solvent, we promise." It worked.

Today, Congress has been making funds available to guarantee business lending, and for a wide variety of purposes that should help maintain financial calm. Whether this is a good idea or not will be debated for a long time I am sure. But, it has nothing to do with the Federal Reserve. All of these actions are entirely compatible with the gold standard.

What about interest rates? Don't we want the Federal Reserve to cut rates when things get iffy? In the 1930s, interest rates were set by market forces. Given the economic turmoil of the time, government bond rates, and especially bill rates, were very low. The yield on government bills spent nearly the whole decade of the 1930s near 0%. Markets lower "risk-free" rates automatically, during times of economic distress, when you just allow them to function without molestation. Every bond trader already knows this.

interest rates

U.S. interest rates, 1919-1941


When we go down the list of all the things that the Federal Reserve, the Treasury, Congress and other regulatory bodies could do, while also adhering to the gold standard, we find that there is really not much left. It turns out that many of the things that supposedly justify floating currencies, are also possible with a gold standard system.

Homework of chapter 2 part ii (due with the first midterm exam)

         Do you support returning to gold standard? Why or why not?

         Do you believe that bitcoin would be the future currency? Why or why not?

Why Does the Price of Bitcoin Keep Going Up?

Breaking down the reasons that Bitcoin's price keeps rising


Updated Dec 17, 2020


As of December 16, Bitcoin has increased by about 195% year-to-date, topping $23,000, but what is driving this meteoric rise? The reasons for its appreciation vary, but Bitcoin has grown from what was once considered a scam by many into something that has matured into a viable investment made by famous billionaire investors, large institutions, and retail investors alike. Why are these investors so bullish on Bitcoin even after it has surpassed all-time highs?



Inflation and the lowering purchasing power amidst massive stimulus spending is driving people to store-of-value assets, including Bitcoin.

Bitcoin's mining reward halving mechanism further proves its scarcity and merit as a store-of-value asset.

Institutional adoption as both an investment and as a service they can provide shows strong confidence in the future of Bitcoin and cryptocurrency.

The infrastructure built around cryptocurrency and Bitcoin has shown immense maturity over recent years making it easier and far safer to invest than ever before.


Inflation and the Lowering Purchasing Power of the Dollar

Since the gold standard was removed in 1971 by Richard Nixon the amount of circulating dollars has steadily increased. Between the year 1975 and just before the coronavirus hit, the total money supply has increased from $273.4 billion to over $4 trillion as of March 9, 2020. Since that date, the total money supply has gone from $4 trillion to over $6.5 trillion as of November 30, 2020, largely due to coronavirus related stimulus bills.


Total money supply (



Congress is currently in talks to pass another stimulus bill of nearly $1 trillion, aimed to help those suffering from the coronavirus. Should this new stimulus bill be passed it would mean that since the onset of coronavirus, around 50% of the world's total supply of US dollars will have been printed in 2020.

While there are certainly people suffering from a lack of jobs and businesses shutting down, the increase in money supply has significant long-term implications for the purchasing power of the dollar.


Purchasing power of the dollar since 1970 (


The stimulus spending has led many to fear far greater inflation rates, and rightfully so. To hedge against this inflation investors have sought assets that either maintain value or appreciate in value. Over the course of 2020, this search for a store-of-value asset to hedge against inflation has brought them to Bitcoin. Why?

There are many assets that are considered a store-of-value. Perhaps the most common assets that come to mind are precious metals like gold or other things that have a limited supply. With gold, we know that it is a scarce resource, but we cannot verify with complete certainty how much exists. And, while it may seem far fetched, gold exists outside of earth and may one day be obtainable via asteroid mining as technology advances.


Why this Matters to Bitcoin

This is where Bitcoin differentiates itself. It is written into Bitcoins code how many will ever exist. We can verify with certainty how many exist now and how many will exist in the future. This makes Bitcoin the only asset on the planet that we can prove has a finite and fixed supply.

In Investopedias Express podcast with editor-in-chief Caleb Silver, Michael Sonnenshein, a board member of the Grayscale Bitcoin Trust, said: The amount of fiscal stimulus that has been injected into the system in the wake of the COVID pandemic to stimulate the economy and get things moving again, I think has really caused investors to think about what constitutes a store of value, what constitutes an inflation hedge and how they should protect their portfolios.

Sonnenshein elaborated further saying: It's important that investors think about that. And I think a lot of them are actually thinking about the juxtaposition between digital currencies, like Bitcoin, which have verifiable scarcity and thinking about that in the context of Fiat currencies, like the US dollar which seemingly are being printed unlimitedly.

Part of Bitcoins price appreciation can certainly be attributed to fears of inflation and its use as a hedge against it. With further money printing on the horizon from stimulus packages, as well as talks of student loan forgiveness from the Biden administration, it is fair to say that inflation will continue, making the case for store-of-value assets more compelling.

The Halving

To further understand why Bitcoin has a verifiable finite limit to its quantity it is important to understand the mechanism built into its code known as the Halving. Every 210,000 blocks that are mined, or about every four years, the reward given to miners for processing Bitcoin transactions is reduced in half.

In other words, built into Bitcoin is a synthetic form of inflation because a reward of Bitcoin given to a miner adds new Bitcoin into circulation. The rate of this inflation is cut in half every four years and this will continue until all 21 million Bitcoin is released to the market. Currently, there are 18.5 million Bitcoins in circulation, or about 88.4% of Bitcoins total supply. Why is this important?

As discussed before, the rising inflation and growing quantity of the US dollar lower its value over time. With gold, there is a somewhat steady rate of new gold mined from the earth each year, which keeps its rate of inflation relatively consistent.

With Bitcoin, each halving increases the assets stock-to-flow ratio. A stock-to-flow ratio means the currently available stock circulating in the market relative to the newly flowing stock being added to circulation each year. Because we know that every four years the stock-to-flow ratio, or current circulation relative to new supply, doubles, this metric can be plotted into the future.

Since Bitcoins inception, its price has followed extremely close to its growing stock-to-flow ratio. Each halving Bitcoin has experienced a massive bull market that has absolutely crushed its previous all-time high.

The first halving, which occurred in November of 2012, saw an increase from about $12 to nearly $1,150 within a year. The second Bitcoin halving occurred in July of 2016. The price at that halving was about $650 and by December 17th, 2017, Bitcoin's price had soared to just under $20,000. The price then fell over the course of a year from this peak down to around $3,200, a price nearly 400% higher than Its pre-halving price. Bitcoins third having just occurred on May 11th, 2020 and its price has since increased by nearly 120%.


Bitcoins price increase can also be attributed to its stock-to-flow ratio and deflation. Should Bitcoin continue on this trajectory as it has in the past, investors are looking at significant upside in both the near and long-term future. Theoretically, this price could rise to at least $100,000 sometime in 2021 based on the stock-to-flow model shown above.

Some investment firms have made Bitcoin price predictions based on these fundamental analysis and scarcity models. In a leaked CitiFX Technicals analysis Tom Fitzpatrick, the managing director at US Citibank, called for a $318,000 Bitcoin sometime in 2021. Live on Bloomberg Scott Minerd, the Chief Investment Officer of Guggenheim Global called for a $400,000 Bitcoin based on their fundamental work.

Institutional Adoption

As discussed, the narrative of Bitcoin as a store of value has increased substantially in 2020, but not just with retail investors. A number of institutions, both public and private, have been accumulating Bitcoin instead of holding cash in their treasuries.

Recent investors include Square (SQ), MicroStrategy (MSTR), and most recently the insurance giant MassMutual, among many others. In total, 938,098 Bitcoin now valued at the time of writing at $19,450,247,760 has been purchased by companies, most of which has been accumulated this year. The largest accumulator has been from Grayscales Bitcoin Trust which now holds 546,544 Bitcoin.

Investments of this magnitude suggest strong confidence among these institutional investors that the asset will be a good hedge against inflation as well as provide solid price appreciation over time.

Aside from companies flat out buying Bitcoin, many companies are now beginning to provide services for them. PayPal (PYPL), for example, has decided to allow crypto access to its over 360 million active users. Fidelity Digital Assets, which launched back in October 2018, has provided custodial services for cryptocurrencies for some time, but they are now allowing clients to pledge bitcoin as collateral in a transaction. The CBOE and the CME Group (CME) plan to launch cryptocurrency products next year. The number of banks, broker-dealers, and other institutions looking to add such products are too many to name, but in the same way that a company must have confidence in an investment, it must also have confidence that the products that they sell have value.

Central banks and governments around the world are also now considering the potential of a central bank digital currency (CBDC). While these are not cryptocurrencies as they are not decentralized, and core control over supply and rules is in the hands of the banks or governments, they still show the governments recognition of the necessity for a more advanced payment system than paper cash provides. This further lends merit to the concept of cryptocurrencies and their convenience in general.


From its initial primary use as a method to purchase drugs online to a new monetary medium that provides provable scarcity and ultimate transparency with its immutable ledger, Bitcoin has come a long way since its release in 2009. Even after the realization that Bitcoin and its blockchain tech could be used for way more than just the silk road, it was still near impossible for the average person to get involved in previous years. Wallets, keys, exchanges, the on-ramp was confusing and complicated.

Today, access is easier than ever. Licensed and regulated exchanges that are easy to use are abundant in the US. Custodial services from legacy financial institutions that people are used to are available for the less tech-savvy. Derivatives and blockchain-related ETFs allow those interested in investing but fearful of volatility to become involved. The number of places that Bitcoin and other cryptocurrencies are accepted as payment is growing rapidly.

In Investopedia;s Express podcast, Grayscales Sonnenshein said the market today has just developed so much more from where we were back then (2017 peak), we've really seen the development of a two-sided market derivatives options, lending and borrowing futures markets. It's just a much more robust 24 hour two-sided market that is starting to act more and more mature with every day that passes.

Along with all of this, the confidence showcased by large institutional players by both their offering of crypto-related products as well as blatant investment into Bitcoin speaks volumes. 99Bitcoins, a site that tallies the number of times an article has declared Bitcoin as dead, now tallies Bitcoin at 386 deaths, with its most recent death being November 18th, 2020 and the oldest death being October 15th, 2010. With Bitcoin smashing through its all-time-high and having more infrastructure and institutional investment than ever, it doesnt seem to be going anywhere.



In class exercise:


1.      If U.S. imports > exports, then the supply of dollars > the demand of the dollars in the foreign exchange market, ceteris paribus. True/False?

Solution: Import means using $ (spending $, or out flow of $) to buy foreign goods In the FX market, supply of $ increases So when supply increases and assume that demand is unchanged, the value of $ will drop


2.      If Japan exports > imports, then yen would appreciate against other currencies. True/False?

Solution: Export means selling domestic products for yen ( in flow of yen from importers who will pay yen for the goods made in Japan; there is an increased demand for yen) In the FX market, demand of yen increases So when demand increases and assume that supply is unchanged, the value of yen will rise.


3.      If the interest rate rises in the U.S., ceteris paribus, then capital will flow out of the U.S. True/False?

Solution: Interest rate rises financial market will become more attractive to foreign investors capital will flow in, not flow out.


Chapter 3 International Financial Market/



Go to and set up a practice account and you can trade with $50,000 virtue money.

Visit get daily foreign exchange market news.



Part I: international financial centers


Financial Hubs Today


For detail, visit


British think tank Z/Yen Group and the China Development Institute have published the 27th edition of the Global Financial Centres Index. The tanking compares the competitiveness of the worlds leading financial cities. Since 2007, the financial center ranking publishes twice a year.


It compares the competitiveness of financial cities based on a survey of more than 29,000 people worldwide. It also considers more than a hundred indices from the World Bank, the Economist Intelligence Unit, and the Organization for Economic Co-operation and Development (OECD). The financial hubs rankings include these five key areas - infrastructure, human capital, business environment, financial sector development, and reputation & general factors.


Top 10 Financial Centers in the World

These are the top ten biggest financial centers in the world, according to the 27th financial center rankings.


         10- Los Angeles

Los Angeles is not just about glitz and glamour. It has also emerged as a global business and finance hub. Los Angeles jumped from 19th place in 2017 to 13th spot last year. It occupies the 10th spot with a score of 723 in the latest ranking.


         9- Geneva

The Swiss city made a huge jump, from the 26th spot in last years GFCI. Geneva currently scores 729 to occupy the 9th spot in the latest GFCI report. The Swiss hub is one of the most livable and most expensive locations on the planet. Geneva is home to several financial institutions, asset management firms, and watchmakers.


         8- San Francisco

Even though San Franciscos score declined from 736 to 732, its ranking jumped from 12th to 8th. Every financial headquarter except Geneva witnessed a decline in its score compared to last year. San Francisco is a major technology and financial hub. It is home to many large financial institutions and venture capital firms.


         7- Beijing

This year, Beijing took 7th place, unchanged from last year even though its score declined from 748 to 734. Beijing has often is described as the Billionaire Capital of the World. Beijings Financial Street is lined with headquarters of the Peoples Bank of China, large state-run banks, and insurance companies.


         6- Hong Kong (HK)

HK is one of the most significant financial locations in Asia. Since last year, the city has suffered a little due to pro-democracy protests, which disrupted the transit, retail, and tourism in HK. The Special Administrative Region of China has a high concentration of banking and financial institutions.


         5- Singapore

Singapore slipped from 4th to 5th place this year, but it is still one of the worlds most business-friendly countries. The island-nation has transformed its economy on the back of hard work and political stability. Singapore is a leading destination for wealth management and insurance firms.


         4- Shanghai

Shanghai is home to the worlds fourth-largest exchange with a market cap of over $4 trillion. Experts predict Shanghai will become the worlds biggest financial hubs within a decade. In the latest ranking, its score (740) is just one point behind Tokyo.


         3- Tokyo

Tokyo is the worlds third-biggest financial center with a score of 741 with many top banking, insurance, and financial services firms located in the city. The Tokyo Stock Exchange is the third-largest in the world, behind only NYSE and Nasdaq. With a rich human capital, Tokyo is both a costly and healthy business environment.


         2- London

Despite Brexit, London is the second biggest financial center on the planet with a score of 742. London has been a global financial hub since the London Stock Exchange was founded in 1698. However, the citys economic prospects dont look promising because businesses move their offices and investments to other cities in Europe due to Brexit. London could fall behind many other cities in the coming years.


         New York

New York retains the title of the worlds leading financial hub. It is home to many of the worlds largest banks, insurance companies, hedge funds, credit rating agencies, and private equity firms. Two of the worlds largest stock exchanges by market capitalization New York Stock Exchange and Nasdaq are based in New York. Its a global city with a mix of various cultures.


Where are Financial Centers Heading?

The rapid rise of business hubs like London seemed invertible all until Brexit. Additionally, COVID-19 has dramatically impacted the acceptance of working for home, well beyond the business sector. Since 2020 due to factors such as coronavirus, it appears that in-person meetings are becoming less vital. Also, recent events such as Brexit and HKs merger with China could complicate these two cities rankings and ratings for the business environment. However, it may surprise you that a recent rating has London catching up on New York regarding financial sector development and other metrics.




         What is the financial district of London called?

Located in Londons heart, Canary Warf and the Square Mile is one of the biggest finance hubs on earth.

         Why is New York the financial capital?

New York is considered the place for finance due to its having the largest stock exchanges in the city, the New York Stock exchange, and the NASDAQ. The city has become a hub for wall street due to its attraction of human capital and funding.

         How did Hong Kong become a financial center?

Under the treaty of Nanking in 1842, China ceded the city to the British. HK quickly became a center for financial sector development due to a robust financial environment and reputation. Additionally, after the communists took over China, many vital industries went over to British ruled HK as an intermediary to China.

         Which is the biggest financial market in the world?

The currency market is the biggest by size and liquidity. FX trading volume beats stocks by a massive 28 to 1 level.




The world is rapidly changing before our eyes. The list of top business hubs is becoming more Asian and less European and North American dominated. However, if the coronavirus pandemic teaches us anything its that the future is unclear, it would be foolish to bet against hubs like New York City vanishing anytime soon.


London. London has been a leading international financial centre since the 19th century, acting as a centre of lending and investment around the world. English contract law was adopted widely for international finance, with legal services provided in London. Financial institutions located there provided services internationally such as Lloyd's of London (founded 1686) for insurance and the Baltic Exchange (founded 1744) for shipping. During the 20th century London played an important role in the development of new financial products such as the Eurodollar and Eurobonds in the 1960s, international asset management and international equities trading in the 1980s, and derivatives in the 1990s.

London continues to maintain a leading position as a financial centre in the 21st century, and maintains the largest trade surplus in financial services around the world. However, like New York, it faces new competitors including fast-rising eastern financial centres such as Hong Kong and Shanghai. London is the largest centre for derivatives markets, foreign exchange markets, money markets, issuance of international debt securities, international insurance, trading in gold, silver and base metals through the London bullion market and London Metal Exchange, and international bank lending. London benefits from its position between the Asia and U.S. time zones, and has benefited from its location within the European Union, though this may end following the outcome of the Brexit referendum of 2016 and the decision of the United Kingdom to leave the European Union. As well as the London Stock Exchange, the Bank of England, the second oldest central bank, and the European Banking Authority are in London, although the EBA is moving to Paris in March 2019 after Brexit.


Economics of Brexit (2020 Update) I A Level and IB Economics (youtube)



Tokyo. One report suggests that Japanese authorities are working on plans to transform Tokyo but have met with mixed success, noting that "initial drafts suggest that Japan's economic specialists are having trouble figuring out the secret of the Western financial centres' success." Efforts include more English-speaking restaurants and services a/nd the building of many new office buildings in Tokyo, but more powerful stimuli such as lower taxes have been neglected and a relative aversion to finance remains prevalent in Japan. Tokyo emerged as a major financial centre in the 1980s as the Japanese economy became one of the largest in the world. As a financial centre, Tokyo has good links with New York City and London.

Hong Kong. As a financial centre, Hong Kong has strong links with London and New York City. It developed its financial services industry while a British territory and its present legal system, defined in Hong Kong Basic Law, is based on English law. In 1997, Hong Kong became a Special Administrative Region of the People's Republic of China, retaining its laws and a high degree of autonomy for at least 50 years after the transfer. Most of the world's 100 largest banks have a presence in the city. Hong Kong is a leading location for initial public offerings, competing with New York City, and also for merger and acquisition activity

Singapore. With its strong links with London, Singapore has developed into the Asia region's largest centre for foreign exchange and commodity trading, as well as a growing wealth management hub. Other than Tokyo, it is one of the main centres for fixed income trading in Asia. However, the market capitalisation of its stock exchange has been falling since 2014 and several major companies plan to delist.



For Discussion: Do we need so many financial centers in Asia?


Is London Losing Its Global Standing After Brexit and Covid-19? (video)

How Brexit disruption will change London's financial centres l FT (youtube)

Post-Brexit trade deal: 'The City of London will find ways of thriving in the future (youtube)





Homework of chapter 3 part I (due with the third midterm exam)

         Will London lose its financial hub status to a EU city such as Frankfurt? Why or why not?


Brexit Is Nipping at Londons Role as a Financial Powerhouse

Britain and the European Union dont trust each other much, and global banks are caught in the middle.


Updated Dec. 24, 2020

LONDON For Britain, its exit from the European Union is supposed to be the start of a new era as a Global Britain, an open, inviting and far-reaching country. For the European Union, Brexit is an opportunity to repatriate some business from across the English Channel and further bolster the continents economic standing in the world.


And for the City of London, a large hub for international banks, asset managers, insurance firms and hedge funds, Brexit is a political headache. Britains financial center has been caught in the middle of these two agendas, leaving the future of the Citys relationship with the rest of Europe fractured and uncertain.


Britain left the free trade bloc at the end of January but immediately entered into an 11-month transition period that has kept everything unchanged. What comes after Dec. 31, when this transition period expires, is being negotiated down to the wire. Hanging in the balance are things like fishing quotas, long lines for customs checks at ports and disruption to automakers and other manufacturers that have fine-tuned a just in time supply chain.


But the global financial firms with big operations in London already know they will lose the biggest benefit of Britains E.U. membership: the ability to easily offer services to clients across the region from a single base, known as passporting. This has allowed a bank in London to provide loans to a business in Venice or trade bonds for a company in Madrid.


One impact of Brexit: British banks are informing many customers in Europe that their accounts must be closed.

After Jan. 1, that wont be so simple. The ability of firms in Britain to offer financial services in the European Union will depend on whether E.U. policymakers determine that Britains new regulations are close enough to their own to be trusted a critical concept known as equivalence.


The problem is that some very common banking activities taking deposits and making loans to companies and individuals, for example - dont qualify for equivalence. The result will be a patchwork arrangement with large holes. Thats why thousands of people, primarily Brits, living in Europe who have British bank accounts have recently been told their accounts will be closed.


To ease the transition Britain decided to copy some of the European Unions regulations. In turn, it hoped that the European Union would allow firms in Britain to keep doing business in the bloc. In early November, Britains chancellor of the Exchequer said his government would accept the E.U. rules in a number of areas, including capital requirements and credit ratings agencies.


But the European Union hasnt reciprocated. The bruised feelings raised by Britains divorce from the bloc continue to influence relations between the two. Officials in Brussels say they are wary that, over time, Britain will exploit its independence and weaken the restrictions on risk and other rules that banks dont like.


That lack of a deal should not be the starting gun for a race to deregulate, Joachim Wuermeling, who is in charge of bank supervision at the Bundesbank, Germanys central bank, said last month.


This has led to a political stalemate, in which London and Brussels remain at odds on several key pieces of financial regulation and unwilling to give market access to each other.


One such rule allows investment firms to offer their services and trade financial securities across borders to clients in the European Union, under a piece of regulation called Mifid II. The bloc is updating its rules for cross-border securities trading and wont grant Britain a stamp of approval until the revision is completed in the middle of next year.


That stance spurred an outraged response from none other than the governor of the Bank of England, Andrew Bailey, who in September complained to members of Parliament about Brusselss behavior.


I just do not see how we can have an equivalence process where the E.U. essentially says, Were not even going to judge equivalence at the moment, because our rules are going to change, Mr. Bailey said. What does that mean, really? It means that they think this is a rule‑taking process. (The accusation of rule-taking is often the ultimate put-down in these talks, meaning that one side is dictating rules to the other.)


The disharmony is underscored by the fact that, unlike the rules that governed pre-Brexit, these regulatory decisions are made unilaterally and can be revoked with short notice.


The lack of agreements mean London will lose financial jobs as a result of Brexit. Even before the year-end deadline, E.U. regulations are compelling banks to shift workers, and capital, to the continent. The movement of decision makers is important: In the event of a crisis, Europes bank overseers dont want critical people to be somewhere offshore, even if its London.


Overall, since mid-2016, financial firms have shifted $1.6 trillion in assets out of Britain, according to EY.

But the process hasnt been completed. It has been delayed by the pandemic, which has made it difficult for people to move and some corporate clients have been more concerned with keeping their business afloat than signing new contracts.


Some banks and their customers apparently want to wait until the last minute to make the actual transfers, Mr. Wuermeling of the Bundesbank said. They would be well advised to act now.


JPMorgan has asked about 200 employees to move from London to other European cities, mainly Paris and Frankfurt, before the end of the year. Another 100 workers are expected to move next year. JPMorgan also plans to move about 200 billion euros in assets to Frankfurt. Goldman Sachs plans to transfer between $40 billion and $60 billion from its British operations to its German subsidiary by the end of the year. That unit held just $3.6 billion at the end of 2019, according to company filings.


All told, lenders with German licenses will move assets worth about 400 billion euros, or $475 billion, to the Continent because of Brexit, according to the Bundesbank. That will more than double the banks assets in the European Union.


The Bundesbank expects banks that have sought German licenses because of Brexit to bring in 2,500 employees, some of whom may be located in other cities like Milan or Amsterdam. Thats hardly the mass migration to the continent predicted a few years ago. (Estimates reached as high as 75,000 jobs relocating out of London to the rest of Europe.)


Still, the moves keep alive a question that has been posed since the Brexit vote in 2016: Could another European capital unseat London as the regions dominant financial center?


So far there has been no single big winner. Money has scattered to Frankfurt, Luxembourg, Dublin and Paris.


London will remain by far the most dominant player, said Michael Grote, a professor at the Frankfurt School of Finance & Management who has studied the effect of Brexit on financial services.


Next year, Britains financial sector is still expected to be one of the largest in the world: The amount of money it manages is about 10 times the size of the British economy. The business that actually relates to clients in the European Union, and would be threatened by regulatory discord, is relatively small.


Not that much business in London and the United Kingdoms financial center actually depends on equivalence, Alex Brazier, the Bank of Englands head of financial stability strategy and risk, told members of Parliament in September. About 10 percent of the Citys 300 billion in annual revenue from finance and insurance comes from clients in the European Union, he said. Of that about a third, or 10 billion, is from activities that could continue under equivalence rules, he added.


While London wont lose its status as the financial capital of Europe, its primacy will be eroded. The market for financial services will become more fragmented.


Andrew Gray, the head of Brexit at PwC, said that dispersal of financial services around the Continent would create more friction in the system, adding to costs. There is economy of scale of having it in London, he said. You lose that economy of scale.


Eshe Nelson reported from London and Jack Ewing from Frankfurt. Michael J. de la Merced contributed reporting from London. Bottom of Form


Chapter 3 - Part II: Floating exchange rate system vs. fixed exchange rate system


For Discussion:

         US is using floating exchange rate system. What is the advantage and disadvantage of this system? DO we need Cheap $ or strong $?

         Chinese currency is pegged to US$. What is the advantage and disadvantage of this system? What about let it float, instead of holding its value at a fixed rate? Can Chinese government control its currency? How? Is cheap RMB always better than Strong RMB, to Chinese government?

         Germany is part of the Euro Zone. Can Germany manipulate Euro?

         Who are the major players in the FX market?

         As compared with stock market, FX market is more volatile or less? Why?

A - set a fixed exchange rate between its currency and another while allowing capital to flow freely across its borders,

B - allow capital to flow freely and set its own monetary policy, or

C - set its own monetary policy and maintain a fixed exchange rate.



The Impossible Trinity or "The Trilemma", in which two policy positions are possible. If a nation were to adopt position a, for example, then it would maintain a fixed exchange rate and allow free capital flows, the consequence of which would be loss of monetary sovereignty.


The Impossible Trinity - 60 Second Adventures in Economics (5/6) (video)


The impossible trinity (also known as the trilemma) is a concept in international economics which states that it is impossible to have all three of the following at the same time:

a fixed foreign exchange rate

free capital movement (absence of capital controls)

an independent monetary policy

It is both a hypothesis based on the uncovered interest rate parity condition, and a finding from empirical studies where governments that have tried to simultaneously pursue all three goals have failed. The concept was developed independently by both John Marcus Fleming in 1962 and Robert Alexander Mundell in different articles between 1960 and 1963.


Policy choices

According to the impossible trinity, a central bank can only pursue two of the above-mentioned three policies simultaneously. To see why, consider this example:

Assume that world interest rate is at 5%. If the home central bank tries to set domestic interest rate at a rate lower than 5%, for example at 2%, there will be a depreciation pressure on the home currency, because investors would want to sell their low yielding domestic currency and buy higher yielding foreign currency. If the central bank also wants to have free capital flows, the only way the central bank could prevent depreciation of the home currency is to sell its foreign currency reserves. Since foreign currency reserves of a central bank are limited, once the reserves are depleted, the domestic currency will depreciate.

Hence, all three of the policy objectives mentioned above cannot be pursued simultaneously. A central bank has to forgo one of the three objectives. Therefore, a central bank has three policy combination options.



In terms of the diagram above (Oxelheim, 1990), the options are:

Option (a): A stable exchange rate and free capital flows (but not an independent monetary policy because setting a domestic interest rate that is different from the world interest rate would undermine a stable exchange rate due to appreciation or depreciation pressure on the domestic currency).

Option (b): An independent monetary policy and free capital flows (but not a stable exchange rate).

Option (c): A stable exchange rate and independent monetary policy (but no free capital flows, which would require the use of capital controls.


Currently, Eurozone members have chosen the first option (a) while most other countries have opted for the second one (b). By contrast, Harvard economist Dani Rodrik advocates the use of the third option (c) in his book The Globalization Paradox, emphasising that world GDP grew fastest during the Bretton Woods era when capital controls were accepted in mainstream economics. Rodrik also argues that the expansion of financial globalization and the free movement of capital flows are the reason why economic crises have become more frequent in both developing and advanced economies alike. Rodrik has also developed the "political trilemma of the world economy", where "democracy, national sovereignty and global economic integration are mutually incompatible: we can combine any two of the three, but never have all three simultaneously and in full."

(from Wikipedia)


 Part III: Forex quote


Understanding Forex Quotes ----


Understanding Forex Quotes by Investopedia


When a currency is quoted, it is done in relation to another currency, so that the value of one is reflected through the value of another. Therefore, if you are trying to determine the exchange rate between the U.S. dollar (USD) and the Japanese yen (JPY), the forex quote would look like this:

USD/JPY = 119.50 USD is the Base currency / JPY is the Quote currency 1 UDS = 119.5 JPY

         This is an indirect quote

This is referred to as a currency pair. The currency to the left of the slash is the base currency, while the currency on the right is called the quote or counter currency. The base currency (in this case, the U.S. dollar) is always equal to one unit (in this case, US$1), and the quoted currency (in this case, the Japanese yen) is what that one base unit is equivalent to in the other currency. The quote means that US$1 = 119.50 Japanese yen. In other words, US$1 can buy 119.50 Japanese yen. The forex quote includes the currency abbreviations for the currencies in question.

Direct Currency Quote vs. Indirect Currency Quote

There are two ways to quote a currency pair, either directly or indirectly. A direct currency quote is simply a currency pair in which the domestic currency is the quoted currency; while an indirect quote, is a currency pair where the domestic currency is the base currency. So if you were looking at the Canadian dollar as the domestic currency and U.S. dollar as the foreign currency, a direct quote would be USD/CAD, while an indirect quote would be CAD/USD. The direct quote varies the domestic currency, and the base, or foreign currency, remains fixed at one unit. In the indirect quote, on the other hand, the foreign currency is variable and the domestic currency is fixed at one unit

         Direct currency quote: foreign currency / domestic currency, such as JPY / USD (one JPY for how many USD)

         Indirect currency quote: domestic currency / foreign currency, such as USD/JPY (one USD for how many JPY)

For example, if Canada is the domestic currency, a direct quote would be 1.18 USD/CAD and means that USD$1 will purchase C$1.18. The indirect quote for this would be the inverse (1/1.18), 0.85 CAD/USD, which means with C$1, you can purchase US$0.85.


In the forex spot market, most currencies are traded against the U.S. dollar, and the U.S. dollar is frequently the base currency in the currency pair. In these cases, it is called a direct quote. This would apply to the above USD/JPY currency pair, which indicates that US$1 is equal to 119.50 Japanese yen.

However, not all currencies have the U.S. dollar as the base. The Queen's currencies - those currencies that historically have had a tie with Britain, such as the British pound, Australian Dollar and New Zealand dollar - are all quoted as the base currency against the U.S. dollar. The euro is quoted the same way as well. In these cases, the U.S. dollar is the counter currency, and the exchange rate is referred to as an indirect quote. This is why the EUR/USD quote is given as 1.25, for example, because it means that one euro is the equivalent of 1.25 U.S. dollars.

Most currency exchange rates are quoted out to four digits after the decimal place, with the exception of the Japanese yen (JPY), which is quoted out to two decimal places.


Cross Currency ( You can find the cross exchange rates at

When a currency quote is given without the U.S. dollar as one of its components, this is called a cross currency. The most common cross currency pairs are the EUR/GBP, EUR/CHF and EUR/JPY. These currency pairs expand the trading possibilities in the forex market, but it is important to note that they do not have as much of a following (for example, not as actively traded) as pairs that include the U.S. dollar, which also are called the majors. (For more on cross currency, see Make The Currency Cross Your Boss.)



USD / JPY = 119.50 1 US$ = 119.5 YEN, to US residents this is an indirect quote; to a Japanese, it is a direct quote.

Base / quote

JPY / USD = 1/119.50 1 YEN = (1/119.5)$, to US residents this is a direct quote; to a Japanese, it is a indirect quote.

Base / quote

Direct quote = 1/(indirect quote) or indirect quote = 1/ (direct quote) *** Inverse relationship


Part IV: what is BID and ASK price on Forex


Forex: Bid and Ask (video)

Bid and Ask
As with most trading in the financial markets, when you are trading a currency pair there is a 
bid price (buy) and an ask price (sell). Again, these are in relation to the base currency. When buying a currency pair (going long), the ask price refers to the amount of quoted currency that has to be paid in order to buy one unit of the base currency, or how much the market will sell one unit of the base currency for in relation to the quoted currency.

The bid price is used when selling a currency pair (going short) and reflects how much of the quoted currency will be obtained when selling one unit of the base currency, or how much the market will pay for the quoted currency in relation to the base currency.

The quote before the slash is the bid price, and the two digits after the slash represent the ask price (only the last two digits of the full price are typically quoted). Note that the bid price is always smaller than the ask price. Let's look at an example:

USD/CAD = 1.2000/05
Bid = 1.2000 (bid rate is 1.2 CAD /$)
sell 1$ at 1.2 CAD
Ask= 1.2005 (ask rate is 1.2005 CAD/$)
buy 1$ at 1.2005 CAD


If you want to buy this currency pair, this means that you intend to buy the base currency and are therefore looking at the ask price to see how much (in Canadian dollars) the market will charge for U.S. dollars. According to the ask price, you can buy one U.S. dollar with 1.2005 Canadian dollars.

However, in order to sell this currency pair, or sell the base currency in exchange for the quoted currency, you would look at the bid price. It tells you that the market will buy US$1 base currency (you will be selling the market the base currency) for a price equivalent to 1.2000 Canadian dollars, which is the quoted currency.

Whichever currency is quoted first (the base currency) is always the one in which the transaction is being conducted. You either buy or sell the base currency. Depending on what currency you want to use to buy or sell the base with, you refer to the corresponding currency pair spot

exchange rate to determine the price.



In class exercise:

1.      1) You just arrived at Toronto airport. How much is $1,000 in CAD?

Solution: USD/CAD=1.2000/05 base is USD sell $ at bid price: 1$=1.2CAD,

So with $1,000, you can convert it to $1,000 * 1.2 CAD/$ = 1,200 CAD

2) The next day, you plan to leave Canada. How many $ in 1,200 CAD? $1,000 or less?

Solution: now you want to buy $: 1$ = 1.25 CAD, so with 1,200 CAD, you can convert it to 1200 CAD / 1.25 CAD/$ = $960



Exercise II:

Assume you have $1000 and bid rate is $1.52/ and ask rate is $1.60 /.

GBP/USD = 1.5200/1.6000

Meanwhile, the bid rate is quoted as 0.625 /$ and the ask rate is quoted as 0.6579 /$.  

USD/GBP = 0.6250 /0.6579

If you convert it to and then convert it back to $, what will happen? 

Answer: Sell at bid and buy at ask price (ask is always higher than bid so you buy high and sell low, since you are dealing with the bank).

$1000 at London, sell $1000 at bid rate, if you use USD/GBP quote, since $ is the base currency.

  $1000 * 0.625 GBP/$ = 625 GBP

  When leaving London, how many $ back from 625 GBP?

  Now buy $ at ask rate

  625 GBP / 0.6579 GBP/$ = 625 / 0.6579=$950 <$1000, you will lose some money in this transaction due to bid ask spread.


Exercise III:

Suppose the spot ask exchange rate is $1.90 = 1.00 (note that base currency here is ) and the spot bid exchange rate is $1.89 = 1.00 (another way to quote the curry should be: USD/GBP = (1/1.9)/(1/1.89) = 0.5263/91) If you were to buy $1,000,000 worth of and then sell them 10 minutes later, how much of your $1,000,000 would be lost by the bid-ask spread? (Hint: You buy at ask and sell at bid)


GBP at $1.60 / and buy $ at 0.6579 /$.  So $1000 / 1.6 $/    *  0.6579 /$ = $950

Exercise IV: The dollar-euro exchange rate is $1.25 = 1.00 and the dollar-yen exchange rate is 100 = $1.00. What is the euro-yen cross rate? (answer: 125 = 1.00)

Exercise V: The AUD/$ spot exchange rate is AUD1.60/$ and the SF/$ is SF1.25/$. The AUD/SF cross exchange rate is: (answer: 1.2800)

Exercise VI: Suppose that the current exchange rate is 0.80 = $1.00. The direct quote, from the U.S. perspective is which of the following?

a)      1.00 = $1.25

b)      0.80 = $1.00

c)      1.00 = $1.80


Exercise VII: If the $/ bid and ask prices are $1.50 and $1.51, respectively, the corresponding /$ bid and ask prices are:

a)      0.6667 and 0.6623

b)      $1.51 and $1.50

c)      0.6623 and 0.6667



$/ bid and ask prices are $1.50 and $1.51 /$ is the inverse of $/ and bid is less than ask.

/$ bid = 1/1.51 1$ = (1/1.51) = 0.6623 ------ bid price

/$ ask = 1/1.50 1$ = (1/1.50) = 0.6667 ------ ask price


Exercise VIII: The dollar-euro exchange rate is $1.25 = 1.00 and the dollar-yen exchange rate is 100 = $1.00. What is the euro-yen cross rate?