Sensitivity to variables - part 2

In this lesson

1. 0:00 Understanding exchange rate notation
2. 2:22 Spot rates versus forward rates explained
3. 3:16 Interest rate parity theory fundamentals
4. 4:19 How interest rates drive currency demand
5. 6:16 Forward rate calculation step by step
6. 8:49 Key takeaways and practice guidance

About this lesson

You'll learn how exchange rates are presented, what happens when currencies weaken or strengthen, and the crucial concept of interest rate parity theory, which explains why forward exchange rates differ from spot rates. The video walks you through the mechanics step by step. You'll discover how to interpret exchange rate notation (like GBP USD 1.30), understand the difference between spot rates (today's price) and forward rates (agreed today, settled later), and apply interest rate parity theory using the forward rate formula. The lesson uses worked examples to show how investors' behaviour—moving money to higher-interest currencies—creates predictable patterns in exchange rate movements. This content directly supports your exam preparation by building the technical knowledge you need to tackle sensitivity analysis questions confidently. Exchange rates are notoriously easy to get wrong, so the lesson emphasises the logic behind each step and encourages you to practise further questions to embed your understanding. By the end, you'll be able to calculate forward rates and explain the economic reasoning behind currency movements.

Duration: 10m