Reading 19: Exchange Rate Calculations

Book 1: Economics

Point

the last decimal place in the spot rate quote

What should the difference between the spot rate and forward rate be equal to?

Should be approximately equal to the difference in the two countries’ interest rates

Covered Interest Rate Arbitrage Strategy

1.) Borrow Currency A at Interest Rate A

2.) Convert to Currency B at the Spot Rate and Invest at Interest Rate B

3.) Receive proceeds and sell them at the forward rate to turn into Currency A

How to think of the forward rate:

it is the rate that prevents arbitrage from happening

Cross Rate

the exchange rate between two currencies implied by the exchange rate in a mutual third currency