Chapter 6: Currency Exchange Rates

In this section

• Nominal versus Real Exchange Rates
  Explore the difference between nominal and real exchange rates, their role in international finance, and how adjustments for price levels affect currency competitiveness.
• Exchange Rate Determination and Regimes
  Understand how exchange rates are determined by supply and demand factors, as well as how various floating, fixed, and managed regimes shape currency markets and influence global investment decisions.
• Purchasing Power Parity and Interest Rate Parity
  Purchasing Power Parity (PPP) and Interest Rate Parity (IRP) are key exchange rate theories for global portfolio managers. Learn how inflation and interest rates shape currency valuations and how these concepts facilitate hedging and risk management in international markets.
• Spot and Forward Exchange Rates
  Gain a deep understanding of spot and forward currency exchange rates, including their role in hedging, speculation, and investment, as well as practical formulas and real-world applications.
• Triangular Arbitrage and Cross Rates
  Explore the fundamentals of triangular arbitrage and cross rates, understand how currency mispricings can lead to riskless profits, and learn best practices to detect and execute these strategies quickly under real-world market conditions.
• Currency Hedging, Speculation, and Carry Trades
  Gain a capstone-level understanding of currency hedging techniques, speculation strategies, and the mechanics of carry trades, along with critical risk management considerations for CFA Level I candidates.
• Effective Exchange Rate Indices
  Learn how to measure a currency’s external value through nominal and real trade-weighted indices, interpret their moves, and apply them in portfolio decisions.
• The Impossible Trinity (Monetary Policy, Exchange Rates, Capital Flows)
  Explore the core trade-offs that shape global currency policies, where countries must choose two out of three objectives: free capital flows, fixed exchange rates, and independent monetary policy.
• Exchange Rate Pass-Through to Domestic Prices
  A comprehensive exploration of how exchange rate movements impact domestic prices, focusing on the mechanics of exchange rate pass-through, its measurement, and implications for inflation, corporate pricing, and investment strategy.