{"id":20897,"date":"2023-01-29T14:41:33","date_gmt":"2023-01-29T14:41:33","guid":{"rendered":"https:\/\/analystprep.com\/study-notes\/?p=20897"},"modified":"2026-06-19T17:56:47","modified_gmt":"2026-06-19T17:56:47","slug":"assessing-the-long-run-fair-values-of-an-exchange-rate","status":"publish","type":"post","link":"https:\/\/analystprep.com\/study-notes\/cfa-level-2\/assessing-the-long-run-fair-values-of-an-exchange-rate\/","title":{"rendered":"Assessing the Long-run Fair Values of an Exchange Rate"},"content":{"rendered":"<script type=\"application\/ld+json\">\r\n{\r\n  \"@context\": \"https:\/\/schema.org\",\r\n  \"@type\": \"QAPage\",\r\n  \"mainEntity\": {\r\n    \"@type\": \"Question\",\r\n    \"name\": \"Which one of the following is a no-arbitrage condition?\",\r\n    \"text\": \"Which one of the following is a no-arbitrage condition?\\n\\nA. Covered interest rate parity.\\nB. Purchasing Power Parity (PPP).\\nC. Forward rate Parity.\",\r\n    \"answerCount\": 1,\r\n    \"acceptedAnswer\": {\r\n      \"@type\": \"Answer\",\r\n      \"text\": \"The correct answer is A.\\n\\nCovered interest rate parity is based on the no-arbitrage condition. This means that it equates the investment of two riskless investments, i.e. domestic and currency-hedged foreign investments.\"\r\n    }\r\n  }\r\n}\r\n<\/script>\r\n\r\n<p><iframe loading=\"lazy\" src=\"\/\/www.youtube.com\/embed\/jeWnVqcAZNs\" width=\"611\" height=\"343\" allowfullscreen=\"allowfullscreen\"><\/iframe><\/p>\r\n\r\n<p>Parity conditions are useful in the assessment of the fair value of currencies. Even then, it is worth clarifying that they cannot be used to gauge the currency value in real time.<\/p>\r\n<p>As discussed previously, parity conditions include the covered interest rate parity, uncovered interest parity, forward rate parity, purchasing power parity, and International Fisher\u2019s effect.<\/p>\r\n<p>There exist authentic studies postulating that the parity conditions do not hold in the short term. The studies, instead, provide a view of exchange rates and the risks associated in the long run. In spite of this, the covered interest rate parity theory is an exception since it is based on the no-arbitrage condition.<\/p>\r\n<p>For instance, statistical evidence has shown that, according to the relative PPP, there is little to see in the relationship between the change in exchange rates and inflation differentials within a short period, such as one year. However, if the investment horizon is extended to, say, 50 years, the connection will be more pronounced. Therefore, PPP would seem to be a suitable structure for assessing fair value in the FX markets. Note that to achieve this, the PPP equilibrium value is prolonged.<\/p>\r\n<blockquote>\r\n<h2>Question<\/h2>\r\n<p>Which one of the following is a no-arbitrage condition?<\/p>\r\n<ol style=\"list-style-type: upper-alpha;\" type=\"A\">\r\n\t<li>Covered interest rate parity.<\/li>\r\n\t<li>Purchasing Power Parity (PPP).<\/li>\r\n\t<li>Forward rate Parity.<\/li>\r\n<\/ol>\r\n<h4>Solution<\/h4>\r\n<p><strong>The correct answer is A<\/strong>.<\/p>\r\n<p>Covered interest rate parity is based on the no-arbitrage condition. This means that it equates the investment of two riskless investments, i.e. domestic and currency-hedged foreign investments.<\/p>\r\n<\/blockquote>\r\n<p>Reading 8: Currency Exchange Rates: Understanding Equilibrium Value<\/p>\r\n<p><em>LOS 8 (h) Explain approaches to assessing the long-run fair values of an exchange rate. <\/em><\/p>\r\n\r\n<div style=\"text-align: center; margin: 30px 0;\"><a style=\"display: inline-flex; align-items: center; justify-content: center; padding: 12px 26px; border-radius: 9999px; background: #1e5bd8; color: #ffffff; font-weight: bold; text-decoration: none;\" href=\"https:\/\/analystprep.com\/free-trial\/\" target=\"_blank\" rel=\"noopener noreferrer\"> Start Free Trial \u2192 <\/a> <p style=\"margin-top: 12px; font-size: 16px; line-height: 1.5;\">trengthen your understanding of long-run fair value exchange rate models with CFA Level 2 study notes, practice questions, and mock exams. <\/p>\r\n <\/div>\r\n","protected":false},"excerpt":{"rendered":"<p>Parity conditions are useful in the assessment of the fair value of currencies. Even then, it is worth clarifying that they cannot be used to gauge the currency value in real time. As discussed previously, parity conditions include the covered&#8230;<\/p>\n","protected":false},"author":4,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[102,494],"tags":[508,216,502,503],"class_list":["post-20897","post","type-post","status-publish","format-standard","hentry","category-cfa-level-2","category-economics","tag-assessing-the-long-run-fair-values-of-an-exchange-rate","tag-cfa-level-2","tag-economics","tag-reading-10-currency-exchange-rates","blog-post","no-post-thumbnail","animate"],"acf":[],"yoast_head":"<!-- This site is optimized with the Yoast SEO plugin v28.3 - https:\/\/yoast.com\/product\/yoast-seo-wordpress\/ -->\n<title>Long-Run Fair Value of Exchange Rates | CFA L2<\/title>\n<meta name=\"description\" content=\"Learn how exchange rates reach long-run fair value using parity conditions like covered interest parity and no-arbitrage relationships.\" \/>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/analystprep.com\/study-notes\/cfa-level-2\/assessing-the-long-run-fair-values-of-an-exchange-rate\/\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"Long-Run Fair Value of Exchange Rates | CFA L2\" \/>\n<meta property=\"og:description\" content=\"Learn how exchange rates reach long-run fair value using parity conditions like covered interest parity and no-arbitrage relationships.\" \/>\n<meta property=\"og:url\" content=\"https:\/\/analystprep.com\/study-notes\/cfa-level-2\/assessing-the-long-run-fair-values-of-an-exchange-rate\/\" \/>\n<meta property=\"og:site_name\" content=\"CFA, FRM, and Actuarial Exams Study Notes\" \/>\n<meta property=\"article:published_time\" content=\"2023-01-29T14:41:33+00:00\" \/>\n<meta property=\"article:modified_time\" content=\"2026-06-19T17:56:47+00:00\" \/>\n<meta name=\"author\" content=\"AnalystPrep Team\" \/>\n<meta name=\"twitter:card\" content=\"summary_large_image\" \/>\n<meta name=\"twitter:label1\" content=\"Written by\" \/>\n\t<meta name=\"twitter:data1\" content=\"AnalystPrep Team\" \/>\n\t<meta name=\"twitter:label2\" content=\"Est. reading time\" \/>\n\t<meta name=\"twitter:data2\" content=\"1 minute\" \/>\n<script type=\"application\/ld+json\" class=\"yoast-schema-graph\">{\"@context\":\"https:\\\/\\\/schema.org\",\"@graph\":[{\"@type\":\"Article\",\"@id\":\"https:\\\/\\\/analystprep.com\\\/study-notes\\\/cfa-level-2\\\/assessing-the-long-run-fair-values-of-an-exchange-rate\\\/#article\",\"isPartOf\":{\"@id\":\"https:\\\/\\\/analystprep.com\\\/study-notes\\\/cfa-level-2\\\/assessing-the-long-run-fair-values-of-an-exchange-rate\\\/\"},\"author\":{\"name\":\"AnalystPrep Team\",\"@id\":\"https:\\\/\\\/analystprep.com\\\/study-notes\\\/#\\\/schema\\\/person\\\/ed0c939f3f12a02c5a193708b713d89e\"},\"headline\":\"Assessing the Long-run Fair Values of an Exchange Rate\",\"datePublished\":\"2023-01-29T14:41:33+00:00\",\"dateModified\":\"2026-06-19T17:56:47+00:00\",\"mainEntityOfPage\":{\"@id\":\"https:\\\/\\\/analystprep.com\\\/study-notes\\\/cfa-level-2\\\/assessing-the-long-run-fair-values-of-an-exchange-rate\\\/\"},\"wordCount\":300,\"keywords\":[\"Assessing the Long-run Fair Values of an Exchange Rate\",\"CFA-level-2\",\"Economics\",\"Reading 10: Currency Exchange Rates\"],\"articleSection\":[\"CFA Level II Study Notes\",\"Economics\"],\"inLanguage\":\"en-US\"},{\"@type\":\"WebPage\",\"@id\":\"https:\\\/\\\/analystprep.com\\\/study-notes\\\/cfa-level-2\\\/assessing-the-long-run-fair-values-of-an-exchange-rate\\\/\",\"url\":\"https:\\\/\\\/analystprep.com\\\/study-notes\\\/cfa-level-2\\\/assessing-the-long-run-fair-values-of-an-exchange-rate\\\/\",\"name\":\"Long-Run Fair Value of Exchange Rates | CFA L2\",\"isPartOf\":{\"@id\":\"https:\\\/\\\/analystprep.com\\\/study-notes\\\/#website\"},\"datePublished\":\"2023-01-29T14:41:33+00:00\",\"dateModified\":\"2026-06-19T17:56:47+00:00\",\"author\":{\"@id\":\"https:\\\/\\\/analystprep.com\\\/study-notes\\\/#\\\/schema\\\/person\\\/ed0c939f3f12a02c5a193708b713d89e\"},\"description\":\"Learn how exchange rates reach long-run fair value using parity conditions like covered interest parity and no-arbitrage relationships.\",\"breadcrumb\":{\"@id\":\"https:\\\/\\\/analystprep.com\\\/study-notes\\\/cfa-level-2\\\/assessing-the-long-run-fair-values-of-an-exchange-rate\\\/#breadcrumb\"},\"inLanguage\":\"en-US\",\"potentialAction\":[{\"@type\":\"ReadAction\",\"target\":[\"https:\\\/\\\/analystprep.com\\\/study-notes\\\/cfa-level-2\\\/assessing-the-long-run-fair-values-of-an-exchange-rate\\\/\"]}]},{\"@type\":\"BreadcrumbList\",\"@id\":\"https:\\\/\\\/analystprep.com\\\/study-notes\\\/cfa-level-2\\\/assessing-the-long-run-fair-values-of-an-exchange-rate\\\/#breadcrumb\",\"itemListElement\":[{\"@type\":\"ListItem\",\"position\":1,\"name\":\"Home\",\"item\":\"https:\\\/\\\/analystprep.com\\\/study-notes\\\/\"},{\"@type\":\"ListItem\",\"position\":2,\"name\":\"Assessing the Long-run Fair Values of an Exchange Rate\"}]},{\"@type\":\"WebSite\",\"@id\":\"https:\\\/\\\/analystprep.com\\\/study-notes\\\/#website\",\"url\":\"https:\\\/\\\/analystprep.com\\\/study-notes\\\/\",\"name\":\"CFA, FRM, and Actuarial Exams Study Notes\",\"description\":\"Question Bank and Study Notes for the CFA, FRM, and Actuarial exams\",\"potentialAction\":[{\"@type\":\"SearchAction\",\"target\":{\"@type\":\"EntryPoint\",\"urlTemplate\":\"https:\\\/\\\/analystprep.com\\\/study-notes\\\/?s={search_term_string}\"},\"query-input\":{\"@type\":\"PropertyValueSpecification\",\"valueRequired\":true,\"valueName\":\"search_term_string\"}}],\"inLanguage\":\"en-US\"},{\"@type\":\"Person\",\"@id\":\"https:\\\/\\\/analystprep.com\\\/study-notes\\\/#\\\/schema\\\/person\\\/ed0c939f3f12a02c5a193708b713d89e\",\"name\":\"AnalystPrep Team\",\"image\":{\"@type\":\"ImageObject\",\"inLanguage\":\"en-US\",\"@id\":\"https:\\\/\\\/secure.gravatar.com\\\/avatar\\\/0828fe7fdfdcf636b2061b4c563e20cc9b7453f7cd1641b4c43edbfba896727a?s=96&d=mm&r=g\",\"url\":\"https:\\\/\\\/secure.gravatar.com\\\/avatar\\\/0828fe7fdfdcf636b2061b4c563e20cc9b7453f7cd1641b4c43edbfba896727a?s=96&d=mm&r=g\",\"contentUrl\":\"https:\\\/\\\/secure.gravatar.com\\\/avatar\\\/0828fe7fdfdcf636b2061b4c563e20cc9b7453f7cd1641b4c43edbfba896727a?s=96&d=mm&r=g\",\"caption\":\"AnalystPrep Team\"}}]}<\/script>\n<meta property=\"og:video\" content=\"https:\/\/www.youtube.com\/embed\/jeWnVqcAZNs\" \/>\n<meta property=\"og:video:type\" content=\"text\/html\" \/>\n<meta property=\"og:video:duration\" content=\"4205\" \/>\n<meta property=\"og:video:width\" content=\"480\" \/>\n<meta property=\"og:video:height\" content=\"270\" \/>\n<meta property=\"ya:ovs:adult\" content=\"false\" \/>\n<meta property=\"ya:ovs:upload_date\" content=\"2023-01-29T14:41:33+00:00\" \/>\n<meta property=\"ya:ovs:allow_embed\" content=\"true\" \/>\n<!-- \/ Yoast SEO plugin. -->","yoast_head_json":{"title":"Long-Run Fair Value of Exchange Rates | CFA L2","description":"Learn how exchange rates reach long-run fair value using parity conditions like covered interest parity and no-arbitrage relationships.","robots":{"index":"index","follow":"follow","max-snippet":"max-snippet:-1","max-image-preview":"max-image-preview:large","max-video-preview":"max-video-preview:-1"},"canonical":"https:\/\/analystprep.com\/study-notes\/cfa-level-2\/assessing-the-long-run-fair-values-of-an-exchange-rate\/","og_locale":"en_US","og_type":"article","og_title":"Long-Run Fair Value of Exchange Rates | CFA L2","og_description":"Learn how exchange rates reach long-run fair value using parity conditions like covered interest parity and no-arbitrage relationships.","og_url":"https:\/\/analystprep.com\/study-notes\/cfa-level-2\/assessing-the-long-run-fair-values-of-an-exchange-rate\/","og_site_name":"CFA, FRM, and Actuarial Exams Study Notes","article_published_time":"2023-01-29T14:41:33+00:00","article_modified_time":"2026-06-19T17:56:47+00:00","author":"AnalystPrep Team","twitter_card":"summary_large_image","twitter_misc":{"Written by":"AnalystPrep Team","Est. reading time":"1 minute"},"schema":{"@context":"https:\/\/schema.org","@graph":[{"@type":"Article","@id":"https:\/\/analystprep.com\/study-notes\/cfa-level-2\/assessing-the-long-run-fair-values-of-an-exchange-rate\/#article","isPartOf":{"@id":"https:\/\/analystprep.com\/study-notes\/cfa-level-2\/assessing-the-long-run-fair-values-of-an-exchange-rate\/"},"author":{"name":"AnalystPrep Team","@id":"https:\/\/analystprep.com\/study-notes\/#\/schema\/person\/ed0c939f3f12a02c5a193708b713d89e"},"headline":"Assessing the Long-run Fair Values of an Exchange Rate","datePublished":"2023-01-29T14:41:33+00:00","dateModified":"2026-06-19T17:56:47+00:00","mainEntityOfPage":{"@id":"https:\/\/analystprep.com\/study-notes\/cfa-level-2\/assessing-the-long-run-fair-values-of-an-exchange-rate\/"},"wordCount":300,"keywords":["Assessing the Long-run Fair Values of an Exchange Rate","CFA-level-2","Economics","Reading 10: Currency Exchange Rates"],"articleSection":["CFA Level II Study Notes","Economics"],"inLanguage":"en-US"},{"@type":"WebPage","@id":"https:\/\/analystprep.com\/study-notes\/cfa-level-2\/assessing-the-long-run-fair-values-of-an-exchange-rate\/","url":"https:\/\/analystprep.com\/study-notes\/cfa-level-2\/assessing-the-long-run-fair-values-of-an-exchange-rate\/","name":"Long-Run Fair Value of Exchange Rates | CFA L2","isPartOf":{"@id":"https:\/\/analystprep.com\/study-notes\/#website"},"datePublished":"2023-01-29T14:41:33+00:00","dateModified":"2026-06-19T17:56:47+00:00","author":{"@id":"https:\/\/analystprep.com\/study-notes\/#\/schema\/person\/ed0c939f3f12a02c5a193708b713d89e"},"description":"Learn how exchange rates reach long-run fair value using parity conditions like covered interest parity and no-arbitrage relationships.","breadcrumb":{"@id":"https:\/\/analystprep.com\/study-notes\/cfa-level-2\/assessing-the-long-run-fair-values-of-an-exchange-rate\/#breadcrumb"},"inLanguage":"en-US","potentialAction":[{"@type":"ReadAction","target":["https:\/\/analystprep.com\/study-notes\/cfa-level-2\/assessing-the-long-run-fair-values-of-an-exchange-rate\/"]}]},{"@type":"BreadcrumbList","@id":"https:\/\/analystprep.com\/study-notes\/cfa-level-2\/assessing-the-long-run-fair-values-of-an-exchange-rate\/#breadcrumb","itemListElement":[{"@type":"ListItem","position":1,"name":"Home","item":"https:\/\/analystprep.com\/study-notes\/"},{"@type":"ListItem","position":2,"name":"Assessing the Long-run Fair Values of an Exchange Rate"}]},{"@type":"WebSite","@id":"https:\/\/analystprep.com\/study-notes\/#website","url":"https:\/\/analystprep.com\/study-notes\/","name":"CFA, FRM, and Actuarial Exams Study Notes","description":"Question Bank and Study Notes for the CFA, FRM, and Actuarial exams","potentialAction":[{"@type":"SearchAction","target":{"@type":"EntryPoint","urlTemplate":"https:\/\/analystprep.com\/study-notes\/?s={search_term_string}"},"query-input":{"@type":"PropertyValueSpecification","valueRequired":true,"valueName":"search_term_string"}}],"inLanguage":"en-US"},{"@type":"Person","@id":"https:\/\/analystprep.com\/study-notes\/#\/schema\/person\/ed0c939f3f12a02c5a193708b713d89e","name":"AnalystPrep Team","image":{"@type":"ImageObject","inLanguage":"en-US","@id":"https:\/\/secure.gravatar.com\/avatar\/0828fe7fdfdcf636b2061b4c563e20cc9b7453f7cd1641b4c43edbfba896727a?s=96&d=mm&r=g","url":"https:\/\/secure.gravatar.com\/avatar\/0828fe7fdfdcf636b2061b4c563e20cc9b7453f7cd1641b4c43edbfba896727a?s=96&d=mm&r=g","contentUrl":"https:\/\/secure.gravatar.com\/avatar\/0828fe7fdfdcf636b2061b4c563e20cc9b7453f7cd1641b4c43edbfba896727a?s=96&d=mm&r=g","caption":"AnalystPrep Team"}}]},"og_video":"https:\/\/www.youtube.com\/embed\/jeWnVqcAZNs","og_video_type":"text\/html","og_video_duration":"4205","og_video_width":"480","og_video_height":"270","ya_ovs_adult":"false","ya_ovs_upload_date":"2023-01-29T14:41:33+00:00","ya_ovs_allow_embed":"true"},"_links":{"self":[{"href":"https:\/\/analystprep.com\/study-notes\/wp-json\/wp\/v2\/posts\/20897","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/analystprep.com\/study-notes\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/analystprep.com\/study-notes\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/analystprep.com\/study-notes\/wp-json\/wp\/v2\/users\/4"}],"replies":[{"embeddable":true,"href":"https:\/\/analystprep.com\/study-notes\/wp-json\/wp\/v2\/comments?post=20897"}],"version-history":[{"count":19,"href":"https:\/\/analystprep.com\/study-notes\/wp-json\/wp\/v2\/posts\/20897\/revisions"}],"predecessor-version":[{"id":44176,"href":"https:\/\/analystprep.com\/study-notes\/wp-json\/wp\/v2\/posts\/20897\/revisions\/44176"}],"wp:attachment":[{"href":"https:\/\/analystprep.com\/study-notes\/wp-json\/wp\/v2\/media?parent=20897"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/analystprep.com\/study-notes\/wp-json\/wp\/v2\/categories?post=20897"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/analystprep.com\/study-notes\/wp-json\/wp\/v2\/tags?post=20897"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}