CFA L1 / Econ / M7. Capital Flows & FX
Module 7 · Economics

Capital Flows and the FX Market

EN: FX quote conventions, bid–ask, percent change, and parity relations.
VN: Quy ước niêm yết FX, bid–ask, biến động %, các quy tắc parity.

1. FX Quote Convention Core

About: Quote = price/base. EUR/USD = 1.10 means 1 EUR costs 1.10 USD. Bid is what dealer pays for base; ask is what dealer charges. Quote convention is exam-critical.Tóm tắt: Báo giá = price/base. P/B tăng → base lên giá. Bid (dealer mua base) < Ask (dealer bán base).
\[ \text{Quote: } \frac{\text{Price currency}}{\text{Base currency}} \quad e.g. \frac{USD}{EUR} = 1.10 \]

Reading

  • P/B Price of 1 unit of base, in price-currency units.
  • EUR/USD = 1.10 1 EUR costs 1.10 USD.
  • Bid < Ask Bid = dealer buys base; Ask = dealer sells base.
Practice problem

USD/EUR = 1.10. How many USD to buy €500?

Show solution
Cost = 500 × 1.10
= $550

2. Bid–Ask Spread Core

About: Spread = ask − bid, dealer's profit. Wider for less-liquid pairs, longer maturities, market stress. Major majors (EURUSD) typically tightest spreads.Tóm tắt: Spread = ask − bid. Rộng hơn với cặp ít thanh khoản, kỳ hạn dài, thị trường stress.
\[ \text{Spread} = \text{Ask} - \text{Bid} \]

Wider spread for: less-liquid pairs, longer maturities, market stress.

Practice problem

USD/EUR bid = 1.0995, ask = 1.1005. Compute spread in pips.

Show solution
Spread = 1.1005 − 1.0995 = 0.0010 = 10 pips
Spread = 10 pips

3. Percent Change in Exchange Rate Core

About: If P/B rises, base appreciates, price currency depreciates. Use the quoted rate consistently (don't flip the ratio mid-calc).Tóm tắt: P/B tăng → base lên giá, price currency mất giá. Dùng tỷ giá đã quote nhất quán.
\[ \%\Delta = \frac{S_t - S_0}{S_0} \times 100\% \]

If P/B rises → base currency appreciates, price currency depreciates.

Practice problem

USD/EUR moves from 1.10 to 1.155. By how much did EUR appreciate vs USD?

Show solution
% change = (1.155 − 1.10)/1.10 = 0.05
EUR appreciated 5% vs USD

4. Parity Relations Concept

About: Three classics linking FX, rates and inflation: PPP, Covered IRP (no-arb), Uncovered IRP (expected). All flow from no-arbitrage logic. Rarely hold exactly but anchor analysis.Tóm tắt: 3 quy tắc parity: PPP, IRP (covered và uncovered). Đều xuất phát từ no-arbitrage.

Three classics

  • PPP Purchasing-power parity — F/S = (1 + πP) / (1 + πB).
  • IRP Covered interest-rate parity — F/S = (1 + rP) / (1 + rB) (no-arbitrage).
  • UIP Uncovered interest-rate parity — expected %ΔS ≈ rP − rB.