• Unit 7: The Foreign Exchange Market

    This unit investigates foreign exchange markets, their structure, and their market participants. In this unit, you will review the variables that affect exchange rates among different currencies. You will also review the theory of purchasing power parity as well as the interest rate parity theory, which are the dominant theories for establishing spot exchange rates and forward rates.

    Completing this unit should take you approximately 3 hours.

    • Upon successful completion of this unit, you will be able to:

      • describe the evolution of monetary standards and the different types of currencies and currency exchange rates;
      • compare direct and indirect quotation; and
      • calculate cross rates, forward rates, and currency swaps.

    • 7.1: Bretton Woods

      • The International Monetary System Book

        This section gives a detailed perspective into the evolution of monetary standards and how the value of money is determined. You will learn how the value of money was determined by gold and how the value of money became independent of gold. The Bretton Woods agreement led to the establishment of the IMF and the World Bank. What effects did the Bretton Woods agreement have on currencies?

    • 7.2: Different Types of Currencies

    • 7.3: Foreign Exchange Markets

      • Currency and Foreign Exchanges Book

        This section discusses currency exchange, exchange rates, and how currency exchange rates are determined based on the direct and indirect currency quotes (also known as the US and European terms, respectively). It also discusses spot rates, forward rates, and cross rates. Why might companies use these tools?

      • Spot Rates, Forward Rates, and Cross Rates Page

        When talking about trading with currencies, it is important to understand what spot rates, forward rates, and cross rates are. Spot rates refer to the rate of the currencies now (the minute when you decide to make the exchange). If you want to make the exchange at a future date but with the current rate, you may opt for forward rates. Cross rates are used to compare the value of a pair of currencies against another major currency. In this article, you will learn to differentiate between spot rates, forward rates, and cross rates. As you read, see if you can identify what the bootstrap method is.

      • Exchange Rates and Currency Exchange Book

        This page discusses how to calculate currency exchange rates and exchange rates. An exchange rate is the value of a state's currency's value compared to another state's. In addition to the rates we examined previously, there are other exchange rates, known as the onshore and offshore rates. An onshore rate favors the national currency traded within its borders. In contrast, an offshore rate is slightly higher for national currency traded outside the state's borders. What is the relationship between restricted currency and the offshore exchange rate?

    • 7.4: Foreign Exchange Risk

      • Foreign Exchange Markets and Rates of Return Book

        This section discusses how to calculate spot rates, forward rates, cross rates, and rates of return, along with other key rates in foreign exchange markets. What are the components of the rate of return on a foreign deposit?

    • Unit 7 Study Resources

      This review video is an excellent way to review what you've learned so far and is presented by one of the professors who created the course.

    • Unit 7 Assessment

      • Unit 7 Assessment Quiz
        Receive a grade

        Take this assessment to see how well you understood this unit.

        • This assessment does not count towards your grade. It is just for practice!
        • You will see the correct answers when you submit your answers. Use this to help you study for the final exam!
        • You can take this assessment as many times as you want, whenever you want.