Level I · Economics · 2026 Curriculum

Learning Module 8
Exchange Rate Calculations

Curriculum 2026
Learning Outcomes

What you must be able to do

Curriculum Year: 2026

LOS 1

Calculate and interpret currency cross-rates.

LOS 2

Explain the arbitrage relationship between spot and forward exchange rates and interest rates, calculate a forward rate using points or in percentage terms, and interpret a forward discount or premium.

1 · Cross-Rate Calculations

    • Cross-Rate — An exchange rate between two currencies that are not directly quoted. Derived from their quotes against a third currency (usually USD).

    • Calculation — Use multiplication or inversion to cancel out the common currency.

    • Example — To get CAD/EUR from CAD/USD and USD/EUR: multiply CAD/USD × USD/EUR.

    • Triangular Arbitrage — Exploiting mispricing between cross-rates and the underlying quotes to earn riskless profit.

CROSS-RATE

If given A/B and B/C, then A/C = (A/B) × (B/C)
Invert if necessary to cancel currencies.

2 · Forward Rate Calculations

    • Forward Points (Swap Points) — Difference between forward rate and spot rate, scaled to the last decimal of the spot quote (usually ×10,000 for four-decimal quotes, ×100 for yen).

    • Forward Discount/Premium — If forward rate > spot, base currency is at a forward premium; if forward < spot, at a discount.

    • Covered Interest Rate Parity — Forward rate is determined by interest rate differential: Ff/d = Sf/d × (1 + rfτ) / (1 + rdτ).

    • Forward Points as Percentage — (F/S – 1) × 100.

    • Interpretation — Currency with higher interest rate trades at a forward discount; lower interest rate at a premium.

COVERED INTEREST PARITY

Ff/d = Sf/d × (1 + rfτ) / (1 + rdτ)
Forward points = (F – S) × 10,000 (or 100 for yen).