Exchange Rates and
Macroeconomic Policy
Chapter 29
Georgios Georgiou - Principles of
Economics
1
What will we learn today?
The role of the foreign exchange market and the
exchange rate.
The considerations that lead countries to choose
different exchange r

The idea to seek minimum risk please read Tutorial 6 and 7 and examples in lecture notes.
It is better for you to prepare the help sheet by yourself, This is just for some rough formulas and concepts I
refer from Your lecture notes. It does not mean it in

Chapter 1
Review: Assets, portfolio, arbitrage & derivatives
This chapter reviews some basic terminology in mathematical nance.
1
The nancial market
Throughout this course, unless otherwise mentioned, we pretend to be US investors.
Thus all prices will be

MA4269 Tutorial 2 Solution
Question 1. Suppose K1 < K2 < K3 . Suppose all options are European and have the same
maturity and underlying asset, and K3 K2 = K2 K1 . Consider the following strategies:
Strategy A: short 2 calls with strike price K2 , buy one

—I
1. In a certain ﬁnancial market, there are n(:=- 3) risky assets whose return rates
have mean vector p and covariance matrix B. It is desired to ﬁnd the portfolio
that has the smallest variance among all portfolios vvhose portfolio weight
vector vv is

Problem 1 [15 marks]
Given that the eifeetive annual interest rate is 1%, ﬁnd the Maealﬂay duration
of the perpetual cash ﬂew
k
{(21,
Give your answer to 4 signiﬁcant ﬁgures.
parpetual cash ﬂow
I:
{(21, CF CF CF CF
a a a E+R cash ﬂow
0 i 2 L—1 3 time (ye

Aggregate Demand and
Aggregate Supply
Chapter 27
Georgios Georgiou - Principles of
Economics
1
What will we learn today?
How the aggregate demand curve illustrates the
relationship between the aggregate price level and the
quantity of aggregate output dem

Inflation and Monetary Policy:
Expectations and Ongoing
Inflation
Chapter 28, pp. 868-875
Georgios Georgiou - Principles of
Economics
1
What will we learn today?
Explain the short-run and the long-run
trade-off between inflation and
unemployment.
The mean

Money, Banks, and the
Central Bank
Chapter 25
Georgios Georgiou - Principles of
Economics
1
What will we learn today?
The various roles money plays and the
many forms it takes in the economy.
How the actions of private banks and
central banks determine th

The Short-Run
Macro Model
Chapter 23
Georgios Georgiou - Principles of
Economics
1
What will we learn today?
The determinants of output in the
short run.
The meaning of the multiplier.
How the inventory adjustment
process moves the economy to its
short

The Money Market and
Monetary Policy
Chapter 26
Georgios Georgiou - Principles of
Economics
1
What will we learn today?
The
structure of the market for
money.
How central banks use their tools
in order to conduct monetary
policy.
Georgios Georgiou - Pri

Production, Income,
and Employment
Chapter 18
Georgios Georgiou - Principles of
Economics
1
What will we learn today?
What Gross Domestic Product, or GDP, is
and the three ways of calculating it.
The difference between real GDP and
nominal GDP and why rea

Fiscal Policy
Chapter 24
Georgios Georgiou - Principles of
Economics
1
What will we learn today?
The nature and significance of fiscal
policy and how we can use it to bring
the economy back to potential
output.
The meaning of government deficit
and how i

Economic Growth and Rising
Living Standards
Chapter 21
Georgios Georgiou - Principles of
Economics
1
What will we learn today?
How long-run growth can be measured by the
increase in real GDP per capita.
Explain the sources of growth.
The factors that expl

The Classical Long-Run
Model
Chapter 20
Georgios Georgiou - Principles of
Economics
1
What will we learn today?
We will describe the assumptions and the
operation of the classical long-run
macroeconomic model.
We will introduce the labor market and the
ag

The Price Level and
Inflation
Chapter 19
Georgios Georgiou - Principles of
Economics
1
What will we learn today?
What
are price indices and how to
construct them.
How to measure inflation.
The economic costs of inflation.
Georgios Georgiou - Principles

—I
Let the differentiable function f (W1, 11:2,. . . ,wn) be subject to the constraints
91(IU1,1U2, . . .,wn) = U and 92(w1,tU2, . . . ,wn) = U.
The Lagrangian function L = L(w1, tug, . . . , in“; A1, A2) is given by
L(W1:wa . . owls A1, A2) = f(wsw2, . .

AY2016-17 Sem1
MA3269 Chapter 5
Method of Lagrange Multiplier
Let the differentiable function f w1 , w2 ,., wn be subject to the constraints
g1 w1 , w2 ,., wn 0 and g 2 w1 , w2 ,., wn 0 .
The Lagrangian function, L Lw1 , w2 ,., wn , 1 , 2 is given by
Lw1

AY2016-17 Sem1
MA3269 Chapter 6
MA3269 Mathematical Finance I
Chapter 6
Basic Option Theory
6.1
Introduction
Derivatives
A derivative is a financial instrument whose value depends on those of some
underlying assets such as stocks and bonds. An option is a

AY2016-17 Sem1
MA3269 Chapter 5
The diagram below shows the situation where the mean of the GMV portfolio exceeds
the risk-free rate, that is,
GMVP
b
rf
a
Unless stated otherwise, we shall assume that the above inequality holds.
GMVP
Nonetheless, we

AY2016-17 Sem1
4.2
MA3269 Chapter 4
Portfolio Mean and Variance
At time t = 0, an individual invests in n assets in such a way that a fraction wi of his
investment capital is invested in asset i . It is possible that wi 0 , which means the
individual shor