Economics
What you must know
Microeconomics: demand and supply, elasticity (price, income, cross), consumer and producer surplus, and market structures (perfect competition, monopolistic competition, oligopoly, monopoly) with their pricing and output implications. Macroeconomics: GDP measurement, inflation (CPI versus GDP deflator), unemployment, business cycles, monetary and fiscal policy transmission, the Phillips curve, and international economics - exchange-rate quoting conventions, interest rate parity, purchasing power parity, and the balance of payments.
Traps
(1) The CPI uses a fixed basket (Laspeyres-type) and overstates inflation by ignoring substitution; the GDP deflator uses a current basket (Paasche-type). (2) Real interest rate is approximately nominal minus inflation; the Fisher relation adds expected inflation to the real rate. (3) In a quote of A per B, an appreciating B means the quote falls. (4) Forward premium or discount is driven approximately by the interest-rate differential. (5) A monopolist produces where marginal revenue equals marginal cost, so price exceeds marginal revenue. (6) Total revenue is maximised at unit elasticity.
Worked example
Spot USD/EUR is 1.10, one-year USD rates are 5% and EUR rates 3%. Covered interest parity gives F = 1.10 x (1.05/1.03) = 1.1214, so the euro trades at roughly a 2% forward premium and the dollar at a forward discount. Rule of thumb: the higher-yielding currency trades at a forward discount.