Intermediate
Understanding Currency Valuation: Purchasing Power Parity and Interest Rate Parity
A focused, technical deep dive into the two classical theories economists use to value currencies: purchasing power parity and interest rate parity. Built for experienced retail investors, HNIs and angel investors who already know what an exchange rate is and want the actual mechanics, not a repeat of the basics. Covers absolute and relative PPP, the real effective exchange rate (REER), the law of one price, covered and uncovered interest rate parity with worked INR/USD arbitrage math, the carry trade, the forward premium puzzle, and how to apply both frameworks when sizing currency risk in an offshore or alternative-asset portfolio. Anchored throughout in RBI data, NSE currency futures and real Indian examples.
The Law of One PriceAbsolute vs Relative Purchasing Power ParityReal Effective Exchange Rate (REER)Covered Interest Rate ParityUncovered Interest Rate ParityCarry Trade MechanicsForward Premium and the Forward Premium PuzzleCurrency Hedging for Offshore Allocations
MODULES
4
DURATION
~2.4 hrs
TRACK
Alternative Investing
What You'll Master
Explain the law of one price and how it underpins both PPP and interest rate parity
Distinguish absolute PPP from relative PPP and apply each using real INR/USD and Big Mac Index data
Calculate REER and interpret what it says about whether the rupee is over- or undervalued
Derive covered interest rate parity and work through a step-by-step INR/USD arbitrage example
Explain uncovered interest rate parity, the carry trade, and why the forward premium puzzle causes it to break down in practice
Use PPP and IRP together to read RBI policy signals and size currency risk in offshore or alternative-asset portfolios
Access Level
LEARNER
Everything included
Full Text Playbooks
Actionable Exercises
Mobile Reading Mode
Lifetime Updates
Curriculum Breakdown
Chapter 1: Foundations of Currency Valuation Theory
3 LessonsChapter 2: Purchasing Power Parity in Depth
4 Lessons▶
Absolute PPP and the Big Mac Index: Comparing Price Levels Across Countries11 min read
▶
Relative PPP: Using Inflation Differentials to Predict Currency Drift12 min read
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Why PPP Breaks Down: Non-Tradables, Trade Barriers and the Balassa-Samuelson Effect11 min read
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Putting PPP to Work: A Long-Run Anchor, Not a Trading Signal10 min read
Chapter 3: Interest Rate Parity in Depth
4 Lessons▶
Covered Interest Rate Parity: The No-Arbitrage Condition and the Forward Premium12 min read
▶
Working the Covered IRP Arbitrage: A Step-by-Step INR/USD Example12 min read
▶
Uncovered Interest Rate Parity and the Logic of the Carry Trade11 min read
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The Forward Premium Puzzle: Why Uncovered IRP Fails in Real Markets11 min read