Currency Exchange Rate Formal Definitions and Formulas

[clearchemist]

Hello All - Are there a set of formal definitions and formulas for reading 21 on Exchange rates? And can someone provide guidance to the musts for currency exchange rates?

I’m studying from the CFAI manuals, and the chapter reading, examples and solutions diverge from the stated learning outcomes in a number of ways. I’d like to make sure that I have the correcf information. In particular I’m seeking formal definitions and formulas for:

1. Nominal, real and spot exchange rates (and their formal relationships)
2. Arbitrage relationships between spots
3. Forward discount premium
4. Forward rate (using spot and interest rate)
5. Equations related to trade flows

I realize that this is a lot of information, and appreciate your help. Links to articles are also appreciated.

[S2000magician]

I’ve written a couple of articles that may be of some help here:

• Currency Exchange Rates: http://financialexamhelp123.com/currency-exchange-rates/
• Covered Interest Rate Parity (IRP) - Pricing Currency Forwards: http://financialexamhelp123.com/covered-interest-rate-parity-irp-pricing-currency-forwards/

[clearchemist]

Just want to comment that I really enjoy what you’ve written on your website. I do well with to-the-point material. Very well written. I noticed one minor point recently in your nominal rate article: quote 1: "nominal interest rates _ cannot be compounded", quote 2: _ BEY is twice the semiannual effective interest rate; in other words, it is a nominal annual rate that is compounded twice per year.

Hopefully this is contructive

[S2000magician]

@clearchemist

Just want to comment that I really enjoy what you’ve written on your website. I do well with to-the-point material. Very well written.

Thank you. I’m glad to be of some small help.

@clearchemist

I noticed one minor point recently in your nominal rate article: quote 1: "nominal interest rates _ cannot be compounded", quote 2: _ BEY is twice the semiannual effective interest rate; in other words, it is a nominal annual rate that is compounded twice per year.

Hopefully this is contructive

Both statements are true: you cannot compound a BEY because it’s a nominal rate. You have to divide it by two to get an effective rate (which you can, then, compound).