MPE707 Exam Information and Revision

MPE707 Exam Information and Revision

Xuan Nguyen and Ha Vu

Deakin Business School - T1.2016

1 / 18
MPE707 Exam Information and Revision

Important notes:
The exam will cover all topics.
Motivating examples and global financial crisis are not
required for the exam.
The subsequent slides summarize the key points in topics 2-7
only.
Topic 1 provides an overview and supporting information for
topics 2-7.

2 / 18
MPE707 Exam Information and Revision
Topic 2 part 1

The foreign exchange market

Defining the forex market.
Features of the forex market.
Forex market participants.
Spot vs. forward exchange rates.
Rate of change in exchange rates.
Direct quote vs. indirect quote.
Cross exchange rates.
Forward premium/discount equation.
Selling at premium/discount/at par.
Important: S(x/y ) denotes the price of currency y in terms of
currency x.

3 / 18
MPE707 Exam Information and Revision
Topic 2 part 2

Balance of Payments accounts

Defining the BoP.

Sub-categories under the Current Account.
Sub-categories under the Capital and Financial Account.
Double-entry accounting system (double-entry bookkeeping).
The fundamental BoP identity.
Official settlements balance.
The J-curve effect.
BoP and national income accounting.
Impacts of transactions on BoP on exchange rates.

4 / 18
MPE707 Exam Information and Revision
Topic 2 part 3

Exchange rate determination, speculation and arbitrage

The demand-supply model of exchange rate determination:

Graphs, fundamental factors that can shift the demand curve
and the supply curve, and analysis.
Destabilizing vs. stabilizing speculation.
Market making.
Defining arbitrage in the forex market.
Two point arbitrage: when does it happen?
Three point arbitrage: profitable sequence and profit amount.

5 / 18
MPE707 Exam Information and Revision
Topic 3

International parity conditions

Defining IRP/CIP and CIP condition.
Steps, profits, and outcomes of CIA.
Defining UIP/Currency carry trade and UIP condition.
Profits and outcomes of UIA.
Defining LOP, PPP and PPP relationship (absolute and
relative versions).
Real exchange rate and its relationship with PPP.
The Big Mac Index: identify if a currency is
undervalued/overvalued against the USD and calculate the
percentage undervalued/overvalued.
Defining real interest, RIP and RIP condition.
Fisher equation, Fisher effect, and international Fisher effect.
6 / 18
MPE707 Exam Information and Revision
Topic 4

The international monetary system, exchange rate

arrangements and intervention
The Gold Standard: basic characteristics, mint parity, par
value, and gold points.
The price-specie flow mechanism under the Gold Standard.
The Bretton Woods system: basic characteristics.
IMF and SDR.
Reasons for the demise of the Bretton Woods system.
Current arrangements according to IMF.
Advantages of flexible and fixed exchange rates.
Monetary policies impacts on exchange rates.
Sterilized and non-sterilized interventions: mechanics (shown
by using the CBs balance sheet) and outcomes.
7 / 18
MPE707 Exam Information and Revision
Topic 5

Foreign exchange derivatives

Defining currency futures (futures contracts).
Features of futures contracts (contract size, maturity date,
initial and maintenance performance bond, marked-to-market,
settlement price and daily price limit).
Six differences between forward and futures contracts: trading
location, contract size, settlement, expiration date, delivery,
and trading costs.
Defining currency options, call option and put option, strike
price, and settlement price.
Defining in-the-money, out-of-the money, and at-the-money
options.
Comparing between American and European options.
Value and net profit/loss of call and put options.
8 / 18
MPE707 Exam Information and Revision
Topic 6

Foreign exchange exposure and management

Defining transaction exposure, economic exposure, and
translation exposure.
Strategies for managing oprerating (economic) exposure.
Strategies for managing translation exposure.
Forward market hedge: nature and domestic value of
payables/receivables.
Money market hedge: nature, steps, and domestic value of
payables/receivables.
Option market hedge: nature and domestic value of
payables/receivables.
Other hedging techniques: leading and lagging, pricing
variation, invoice currency, and netting and matching.
9 / 18
MPE707 Exam Information and Revision
Topic 7

International banking and global financial markets

Reasons for international banking.
A surplus unit (SU) and a deficit unit (DU).
Roles of international banking in direct and indirect finance.
Organizational arrangements: correspondent banks,
representative offices, foreign branches, subsidiaries and
affiliate banks.
Defining Eurocurrency markets, Eurocurrency, Eurobanks,
Eurocredits, Eurobonds.
Key features of Eurocurrency markets.
Process of Eurocurrency deposits/loans creation using balance
sheets of Eurobanks.
Defining LIBID and LIBOR and the process of tiering in the
interbank market.
10 / 18
MPE707 Exam Information and Revision
The final exam

Important information about the final exam

Weights for assessment:

Assignment: 40%.
Final exam: 60%.
Hurdle requirement: students must pass the final exam to
pass the unit (achieving 50% or more of the total mark
available for the final exam, i.e. 30/60).
Closed book exam.
No formula sheet provided.
Calculators permitted.
Exam will cover all topics.

11 / 18
MPE707 Exam Information and Revision
The final exam

Structure of the final exam

Two Sections: Section A and Section B.

Section A and Section B carry equal marks.
There are two numerical problems in Section A. They carry
equal marks.
There are two descriptive questions in Section B. They carry
equal marks.
All questions/problems have multiple parts.
All questions/problems are compulsory.

12 / 18
MPE707 Exam Information and Revision
The final exam

Structure of the final exam: Section A

Below are the focus of each part in each problem in Section A.

Note some minor details might come from other topics as well.
Total mark for Section A is 30.
Problem 1:
Part (a) [7.5 marks]: Topic 2 part 2.
Part (b) [7.5 marks]: Topic 2 part 1, Topic 2 part 3.
Problem 2:
Part (a) [5 marks]: Topic 5.
Part (b) [10 marks]: Topic 3, Topic 6.

13 / 18
MPE707 Exam Information and Revision
The final exam

Structure of the final exam: Section B

Below are the focus of each part in each question in Section B.

Note some minor details might come from other topics as well.
Total mark for Section B is 30.
Question 1: Analysis of a real or hypothetical
context/phenomenon.
Part (a) [7.5 marks]: Topic 2 part 3, Topic 4.
Part (b) [7.5 marks]: Topic 2 part 3, Topic 4.
Question 2: Concepts/mechanism explanations and
discussions.
Part (a) [7.5 marks]: Topic 4, Topic 7.
Part (b) [7.5 marks]: Three concepts from any Topic.

14 / 18
MPE707 Exam Information and Revision
The final exam

Some tips for exam preparation

Focus on lecture slides.

Something unclear: read the textbook and posted materials.
Attempt problem sets (especially extra problems).
Attempt past exams.

15 / 18
MPE707 Exam Information and Revision
The final exam

Some tips on presenting answers

Provide equations followed by calculations.

Provide clear explanations and arguments.
Be confident to add ideas which might support the
explanations/arguments.
Be confident to use graphs/diagrams and/or examples to
support ideas.
Be sure to name the axis and lines/curves in graphs/diagrams.

16 / 18
MPE707 Exam Information and Revision
The final exam

Exam consultation hours

The schedule of the unit teams consultation hours during the

exam period will be provided on 25 May 2016 via
CloudDeakins news section.

17 / 18
MPE707 Exam Information and Revision
The final exam

Good luck for the exam!

18 / 18