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Lesson 10 of 20

Foreign Exchange Rate Systems and Parity Relationships

There are two major categories of exchange rate systems:

  • Flexible or Floating – laws of supply and demand determine currency value
  • Fixed – the government pegs the exchange rate value and actively participates in currency markets to maintain the value

The market quotes nominal exchange rates whereby a unit of once currency can be exchanged for some amount of another currency.  The real exchange rate reflects the price level differentials of the currencies being exchanged.

Real Exchange Rate Foreign/US =

Nominal Exchange Rate Foreign/US x (Price Level US / Price Level Foreign)

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Balance of Payments

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Foreign Exchange Floating Rate Systems

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Economics

20 lessons

Lessons

1
CFA Level 2: Economics - Introduction
2
Economic Growth
3
Changes in Productivity: The One-Third Rule
4
The Productivity Curve
5
Economic Growth Theories
6
Government Regulation, Deregulation, and Regulatory Behaviour
7
Gross Domestic Product (Measuring Economic Activity)
8
International Trade & Trade Restrictions
9
Balance of Payments
10
Foreign Exchange Rate Systems and Parity Relationships
11
Foreign Exchange Floating Rate Systems
12
Fixed Exchange Rate Systems
13
Overview of Currency Markets
14
Forward Exchange Rates
15
Interest Rate Parity
16
Purchasing Power Parity (PPP)
17
International Fisher Relation
18
Uncovered and Covered Interest Rate Parity Relationship
19
Forecasting Exchange Rates
20
CFA Level 2 Economics – Recommendations
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