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EconomicsModule 8 of 8

Exchange Rate Calculations

6

Concepts

4

Formulas

1

Decisions

4

Quiz Questions

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Key Concepts

6 concepts covered in this module.

Exchange Rate Quotation

Direct: domestic per foreign (e.g., 1.25 USD/EUR). Indirect: foreign per domestic. Price/Base convention: P/B.

Bid-Ask Spread

Dealer buys at bid, sells at ask. Spread = ask - bid. Always buy high (ask) and sell low (bid) from YOUR perspective.

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Formulas

4 essential formulas for this module.

Cross Rate

A/C = (A/B) × (B/C)

Where: Multiply rates to find the cross rate

Forward Rate (CIP)

F/S = (1 + rprice) / (1 + rbase)

Where: F = forward, S = spot, r = interest rate for the period

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Decision Frameworks

1 decision frameworks to guide your analysis.

How to determine if arbitrage exists?

  • Compare calculated cross rate to market cross rate
  • If different, buy low and sell high through the triangle
  • Forward rate vs spot × interest rate differential for covered interest arbitrage

Mind Map

Visual overview of how concepts connect in this module.

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Exchange Rate Quotation

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Answer
Direct: domestic per foreign (e.g., 1.25 USD/EUR). Indirect: foreign per domestic. Price/Base convention: P/B.
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Capital Flows and the FX Market