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CFA Level 1 - Purchasing Power Parity and Interest Rate Parity
1. Stock Picking II. Purchasing Power Parity
2. Forex
3. Options Trading Purchasing Power Parity
4. Credit Crisis Purchasing power parity expresses the idea that a bundle of goods in one country should cost the same in another country after exchange rat
Suppose that with existing relative prices and exchange rates, a basket of goods can be purchased for fewer U.S. dollars in Canada than in th
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then expect U.S. consumers to buy those goods in Canada. Even if this is not possible from a transportation or cost viewpoint, some business
buy the goods cheaply in Canada and remarket them in the United States. Such actions would cause U.S. dollars to be sold in exchange for C
Dictionary the U.S. dollar would depreciate in relation to the Canadian dollar. We would expect the currency depreciation to continue until the bundle of g
countries.
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Interest Rate Parity
Exam Prep Interest rate parity has to do with the idea that money should (after adjusting for risk) earn an equal rate of return. Suppose that an investor ca
dollar deposit in a United States bank, or can earn 4% interest with a British pound deposit in a London bank. The investor can earn greater in
Exam Quizzer funds in dollars and, therefore, one might expect all of his investment funds to flow to U.S. banks. However, exchange rate expectations also
investor expects the British pound to appreciate at the rate of 2% in terms of the dollar. That investor would then be indifferent to either invest
Tutorials expected to earn 6%.
Beginners Why Central Banks Intervene in the Market
Experienced Investors
Suppose the United States Federal Reserve is interested in the dollar to euro exchange rate. It can directly influence that exchange rate by bu
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Retirement dollars. If the Fed buys euros with dollars, it will increase the supply of dollars and decrease the supply of euros. This action tends to cause th
relation to the euro.
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A central bank will intervene in the foreign exchange market because it wishes to reduce volatility, and/or it has a specific target exchange rat
FXtrader euro and dollar to trade 1:1, with an allowable range of 2% in either direction. If the exchange rate rose to above 1.02 euros per dollar, the Fe
exchange rate fell below .98 euros per dollar, it would buy dollars.
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Table of Contents
Free Tools 1) CFA Level 1 - Chapter 5: Global Economic Analysis
2) CFA Level 1 - Production Possibility Curves
Calculators
3) CFA Level 1 - Trade Efficiency Rule
Free Newsletters 4) CFA Level 1 - Terms of Trade
5) CFA Level 1 - Tariffs and Quotas
6) CFA Level 1 - Trade Restrictions
7) CFA Level 1 - International Finance Basics
8) CFA Level 1 - Purchasing Power Parity and Interest Rate Parity
9) CFA Level 1 - Foreign Exchange Basics
10) CFA Level 1 - Spread Calculations
11) CFA Level 1 - Spot Market Calculations
12) CFA Level 1 - Forward Market Calculations
13) CFA Level 1 - Interest Applications
14) CFA Level 1 - Foreign Exchange Parity Relations - Basics
15) CFA Level 1 - Foreign Exchange Parity Relations - Influences
16) CFA Level 1 - Effects of Monetary Policy on the Exchange Rate and Balance of
Payments
17) CFA Level 1 - Fixed vs. Pegged Exchange Rate Systems
18) CFA Level 1 - Absolute and Relative Purchasing Power Parity
19) CFA Level 1 - Relative Purchasing Power Parity
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