Browse CFA Level 2

Chapter 12: Advanced Parity Models and Empirical Methods

In this section

  • Extensions of Interest Rate Parity
    Explore how transaction costs, capital controls, and country risk affect the traditional interest rate parity relationship. Delve into Forward Rate Parity’s theoretical underpinnings and walk through extended IRP calculations in real-world scenarios.
  • Real Exchange Rate Determination
    Explore nominal vs. real exchange rates, the Balassa-Samuelson effect, terms of trade, measurement challenges, and more, with practical vignettes and examples.
  • Empirical Testing of Purchasing Power Parity
    Explore core PPP theories, empirical challenges, and practical cointegration approaches to assess whether exchange rates converge to purchasing power parity over time.
  • Non-Linear Models and Forecasting Exchange Rates
    A deep dive into threshold, Markov switching, and smooth transition methods for predicting exchange rate regimes and managing non-linear dynamics in currency markets.
  • Vignette Exercises: Testing Parity in Real-World Data
    Explore practical multi-part item sets, real-case scenarios, and empirical methods for testing covered and uncovered interest rate parity, PPP-based valuations, and real exchange rate paths.
  • Additional Considerations and Practical Implementation
    Discover how to bridge advanced parity theory and real-world data applications, exploring key software tools, data sources, and empirical modeling approaches. Learn how to recognize when deviations from parity create both profit opportunities and risks, and solidify exam-ready insights for currency forecasting and risk management.
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