Exchange Rate Calculations
Refresher reading access
Introduction
The foreign exchange market facilitates international currency and trade flows, and it is important to understand how currency exchange rates are calculated. Market participants can also derive cross-rates to expand trading opportunities by determining quotes for currencies not directly traded. Understanding the concept of arbitrage relationships in the foreign exchange market provides a basis for understanding the interrelationships between four key market inputs. Global entities trade currencies for a wide variety of purposes and understanding the relationships between the market factors affecting spot and forward rates is crucial. These interactions are reinforced by the calculations in the second lesson.
Learning Outcomes
The candidate should be able to:
- calculate and interpret currency cross-rates
- explain the arbitrage relationship between spot and forward exchange rates and interest rates, calculate a forward rate using points or in percentage terms, and interpret a forward discount or premium
0.5 PL Credit
If you are a CFA Institute member don’t forget to record Professional Learning (PL) credit from reading this article.