CFA Level II — Economics flashcards

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Currency exchange rates (quotes, cross rates and forward points, the parity conditions, carry trades, the balance of payments and policy) and economic growth (growth accounting, Solow and endogenous growth, convergence, and growth and asset returns).

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A dealer quotes USD/EUR at 1.1000/1.1004. At what price does the dealer buy euros, and what does a client pay to buy them?

The dealer buys euros at the bid, 1.1000, and sells them at the offer, 1.1004, so a client buying euros pays 1.1004 US dollars each; quotes are always for buying or selling the base currency.

Watch out: the client always deals on the side less favourable to it.
Economics › Exchange Rate Quotes and Arbitrage
What tends to widen the bid–offer spread a dealer quotes to a client?

Wider interbank spreads, a larger trade size, a less liquid currency pair, higher volatility and a weaker client relationship or credit standing.
Economics › Exchange Rate Quotes and Arbitrage
USD/EUR is 1.1000/1.1002 and JPY/USD is 150.00/150.02. What is the JPY/EUR bid–offer?

165.000/165.052 — multiply bids by bids and offers by offers: 150.00 × 1.1000 and 150.02 × 1.1002.

Watch out: when a quote must be inverted first, the new bid is 1 ÷ the old offer, and the new offer 1 ÷ the old bid.
Economics › Exchange Rate Quotes and Arbitrage
When does triangular arbitrage exist in currency quotes?

When a dealer's cross-rate bid is above the offer implied by the other two pairs, or its offer is below the implied bid; trading round the three currencies then locks in a riskless profit. If the ranges overlap, there is none.
Economics › Exchange Rate Quotes and Arbitrage
A forward is quoted as spot 1.3000 plus 30 points, on a rate shown to four decimals. What is the forward rate, and what do positive points mean?

1.3030 — the points are scaled to the last decimal (0.0030). Positive points mean the base currency trades at a forward premium.
Economics › Exchange Rate Quotes and Arbitrage
If the base currency's interest rate is above the price currency's, are the forward points positive or negative?

Negative — the higher-yielding base currency trades at a forward discount, which offsets its interest advantage under covered interest parity.
Economics › Exchange Rate Quotes and Arbitrage
Six months ago a firm sold EUR 10 million forward for one year at 1.1200 USD/EUR. The six-month forward is now 1.1000, and the six-month USD rate is 4% (actual/360, 180 days). What is the contract worth?

About USD 196,078 to the firm: buying euros forward at 1.1000 locks in 0.0200 × 10 million = USD 200,000 at settlement, discounted at 1 + 0.04 × 180/360.

Watch out: discount at the price currency's interest rate for the remaining term.
Economics › Exchange Rate Quotes and Arbitrage
USD/EUR rises from 1.00 to 1.25. By how much has the euro appreciated and the dollar depreciated?

The euro appreciates 25%, but the dollar depreciates 20% against the euro, since 1 ÷ 1.25 = 0.80; the two percentages are not equal.
Economics › Exchange Rate Quotes and Arbitrage
An investor converts USD 1 million to euros at an offer of 1.1004 USD/EUR and straight back at a bid of 1.1000. What does the round trip cost?

About USD 364: 1,000,000 ÷ 1.1004 ≈ EUR 908,760, which buys back only about USD 999,636 at 1.1000. The loss is the bid–offer spread.
Economics › Exchange Rate Quotes and Arbitrage
What does covered interest rate parity state?

The forward rate equals spot adjusted by the interest differential, so a currency-hedged foreign deposit earns the same as a domestic one: $F_{f/d} = S_{f/d} \frac{1 + i_f \tau}{1 + i_d \tau}$ ⁠.

Why: it is enforced by arbitrage, so it is the parity condition that holds most closely.
Economics › Parity Conditions

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About these cards

Review status: Second-reader reviewed, with corrections applied.

Checked against:

CFA Program 2026 and 2027 Level II topic outlines, Economics (topic outline only; no text copied)
Checked against standard texts in international economics and macroeconomics (reference only; no text copied).

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