Reading 19: Exchange Rate Calculations
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Book 1: Economics
Last updated 10:20 PM on 5/28/25
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5 Terms
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Point
the last decimal place in the spot rate quote
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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
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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
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How to think of the forward rate:
it is the rate that prevents arbitrage from happening
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Cross Rate
the exchange rate between two currencies implied by the exchange rate in a mutual third currency
Note 
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