Economics: CFA® Level II

It is 5–10% of the 2027 Level II exam. 25 learning outcomes across 2 learning modules.

56 practice questions and 0 formula cards on this topic in the app.

Currency Exchange Rates: Understanding Equilibrium Value

• For a spot or forward currency quote, work out and explain its bid–offer spread and say what makes that spread wider or narrower
• Given bid–offer quotes for three currencies, spot a triangular arbitrage and work out the profit it yields
• Explain spot and forward exchange rates and work out a currency's forward premium or discount
• Work out a forward contract's value when marked to market
• Explain the international parity conditions, namely interest rate parity in its covered and uncovered forms, the international Fisher effect, purchasing power parity and forward rate parity
• Set out how the international parity conditions link to one another
• Judge how well today's spot rate, the forward rate, uncovered interest parity and purchasing power parity each forecast future spot rates
• Explain the ways of estimating what an exchange rate is fairly worth over the long run
• Explain the carry trade and its link with uncovered interest rate parity, and work out what it earns
• Explain how the flows recorded in the balance of payments move exchange rates
• Explain what fiscal and monetary policy may do to exchange rates
• Set out why central banks or governments intervene in currency markets or impose capital controls, and how well such measures work
• Set out the signals that a currency crisis may be coming

Economic Growth

• Contrast what helps and what holds back economic growth in developing versus developed economies
• Explain how long-run stock market gains relate to the economy's sustainable rate of growth
• Explain why equity and fixed income investors care about potential GDP and how fast it grows
• Contrast technological progress with capital deepening and explain how each drives growth and labour productivity
• Show how growth accounting can be used to forecast potential GDP
• Explain the effect of natural resources on growth and judge the claim that scarce resources hold growth back
• Explain how immigration, demographics and labour force participation shape how fast and how sustainably an economy grows
• Explain how spending on human capital, physical capital and technology development feeds economic growth
• Contrast the classical, neoclassical and endogenous theories of growth
• Explain the convergence hypotheses and judge how well they hold
• Explain the economic case for governments encouraging private investment in knowledge and technology
• Set out what dropping trade barriers is likely to do to capital investment and profits, to jobs and wages, and to growth in each economy concerned