Combine what you have learned, for example, you find that China’s exports have increased recently, and then predict the Demand of Yuan will increase, so it is predicted that the RMB will appreciate, and at this ti
ECO365 Class 1
Chen Donger | 1/11/25
ECO365 CLASS 1 Chen Donger | 1/11/25
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ECO365 CLASS 1 Chen Donger | 1/11/25
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Learning objectives for this lesson
Syllabus analysis
• Share
• Assignment requirements & ideas
Chapter 1
• Exchange Rate
• Cross Rate
Syllabus analysis
• Midterm Test 30%
o Date: 2.25 (in person)
• Quiz 15%
o Date: 3.14 (online & 9am – 9pm)
o Generally speaking, there are two questions
• Final Exam accounts for 40%
o Exam period
• Assignment 15%
o 4.1 @ 9am
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Assignment analysis
• Main content: Use virtual money to analyze the market in the real foreign exchange and stock markets, then trade and write a summary in a paper.
• What the professor values: Whether you make money in the end is not important; what is important is the process of analyzing the market using the knowledge you have learned.
• A total of 1 million Canadian dollars is available.
• Can buy and sell: foreign currency, stock, commodities make up the entire investment portfolio
• Writing ideas:
o Combine what you have learned, for example, you find that China’s exports have increased recently, and then predict the Demand of Yuan will increase, so it is predicted that the RMB will appreciate, and at this time you choose to buy RMB.
o Read more news, such as the recent US election. For some reasons, it is possible to speculate that Tesla’s stock price may rise at this time.
o The reason for each transaction, whether buying or selling, needs to be clearly stated. The results should also be clearly stated, such as why the stock made a profit or loss.
o Finally, all investments need to be sold and converted into Canadian dollars, and the profit and loss situation in Canadian dollars must be calculated.
o Start early.
• Length requirement:
o Excluding references the report should be no more than 3 single spaced pages in length
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Chapter 1: Exchange Rate
• Definition: the number of domestic currency units needed to purchase 1 unit of foreign currency
For example:
o Foreign currency priced in domestic currency
o Direct quote
• Notation: E (or S)
o E stands for (Spot) Exchange rate
• Changes:
o If E increases then it means, domestic currency __________
o If E decreases then it means, domestic currency __________
• In addition,!" (indirect quote)
o Definition: the number of foreign currency units needed to purchase 1 unit of domestic currency
For example:
Example: let the USD (US dollar) be the domestic currency and the Great British Pound (GBP) the
foreign currency. A direct quote is 1.6365 dollars per pound, so an indirect quote is !!.$%$& = 0.6111
pounds per dollar.
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Midterm compulsory test type 1: Trade Currency
• Arbitrage
o Arbitrage is the existence of riskless profit
o Buy low & sell high
• Cross Rate (C)
o Will make an appointment
• Example: consider the following direct quotes:
o 1.6365 dollars per pound,
o 0.8788 euros per USD and 1.4373 euros per GBP.
o Then the cross rate between USD and GBP using the euro as an intermediate currency, C, is
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Practice: Suppose the Canadian dollar-US dollar rate is 1.35 Canadian dollars (CAD) per US dollar
(USD). The Euro-USD rate is 1.1864 euros per US dollar. The Euro-CAD rate is 0.9824 euros per
Canadian dollar.
a. Calculate the cross rate between Canadian dollars (CAD) and US dollars (USD) using the euro as an
intermediate currency.
b. Suppose an investor has 800,000 CAD. Calculate profits from triangular arbitrage which uses the
cross rate between CAD and USD.
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Ways to Eliminate Arbitrage:
• Commissions on trades
• Bid-Ask Spreads
o The bid is the price a buyer wants to pay for a good or asset.
o The ask is the price a seller wants for a good or asset.
Midterm Must-Test Question Type 2: Bid – Ask Spreads
• No Arbitrage
• Only Ask price
Example: consider two foreign exchange markets, New York and Paris, as well as the USD-euro rate.
• NY: bid=1.1235 USD per euro. ask= 1.1239 USD per euro.
• Paris: bid=0.8897 euros per USD. ask= 0.89 euros per USD.
• Convert 1000 euros to USD in Paris then back to euros in NY. Determine if arbitrage exists.