AØKA08223U Economics of Exchanges Rates (F)

Volume 2021/2022

MSc programme in Economics – elective course

The course is part of the Financial line at the MSc programme in Economics,   symbolized by ‘F’.


This course focuses on issues in international money and finance using both a macroeconomic approach where exchange rates are explained by macroeconomic relationships and a microeconomic approach where exchange rates are determined by the interaction between market participants, for example dealers, corporations and central banks. Key topics include foreign exchange markets, how trades take place in the interbank and the retail segments of the market, exchange rate risk, carry trade, exchange rate determination, central bank interventions, order flows as a determinant of exchange rates, and the effects of a broad set of new economic information.


The main theme of this course is to combine theoretical models with empirical testing. Throughout the course, we first present a particular theoretical model and then we turn to the data and test whether the predictions (or assumptions underlying the theory) are consistent with actual behavior.


The course is divided into two modules. In the first module we apply a macroeconomic perspective on exchange rate determination focusing on flexible price and sticky price models as well as portfolio balance models. The empirical support for these models is discussed and we evaluate the models using their forecast performances. Central bank interventions are discussed from both theoretical and empirical perspectives.


The second module focuses on the microeconomic approach where we study the interaction of market participants and how the trading process determines the price of foreign exchange, the microstructure of the foreign exchange market. We will study how and why order flows determine exchange rates. The module also bridges the gap between microstructure and macroeconomic perspectives by analyzing the effects of releases of macroeconomic news on the exchange rate

Learning Outcome

After completing the course the student is expected to be able to:



  • Account for how the foreign exchange market is organized and refect on how trades take place in the market.
  • Describe the institutional features of the foreign exchange market products (spot and forward contracts) and be able to distinguish between speculation and arbitrage.
  • Reflect on the types of risks that foreign exchange traders face and explaine how these can be accounted for.
  • Describe and explain Covered Interest Rate Parity (CIP), Uncovered Interest Rate Parity (UIP), and Purchasing Power Parity (PPP) and be able to summarize the empirical evidence on international interest these parity conditions.
  • Describe the main models of exchange rate determination (the Mundell-Fleming mode, the Monetary approach to the exchange rate, Dornbusch overshooting model, the portfolio balance model and Lucas asset pricing model) and summarize the empirical evidence on these models.
  • Account for how macro data releases affect exchange rates and summarize the empirical evidence.
  • Identify and describe the channels by which central bank intervention can affect the exchange rate and summarize the empirical evidence on these channels.



  • Master and apply the main models of exchange rate determination to analyze the effects of monetary and fiscal policy on the exchange rate,
  • Master and apply microstructure based models to analyze price determination on the foreign exchange market.
  • Assess and apply investment strategies based on international parity conditions.



  • Plan and process relevant information for the analysis of the foreign exchange market.
  • Manage and carry out economic analysis related to exchange rate determination, forecasting and international financial management. in new unpredictable situations.



  • Pilbeam K., (2013), International Finance, Palgrave Macmillan, fourth edition.
  • Sarno L. and M.P. Taylor, (2002), The Economics of Exchange Rates, Cambridge University Press.
  • Journal articles


Total number of pages: 450

The course requires a good grasp of both econometrics and mathematics.

It is recommended to have a background in finance and econometrics equivalent to the course "Corporate Finance and Incentives" at the Bachelor programme in Economics, University of Copenhagen.

Restrictions due to pandemic crisis:
The teaching in this course may be changed to be taught either fully or partly online due to a pandemic crisis like COVID-19. In case of changes and further information, please read the study messages in KUnet or the announcements in the course room on Absalon (for enrolled students).
2 hours lectures 1 to 2 times a week from week 6 to 20.

The overall schema for the Master can be seen at KUnet:
MSc in Economics => "courses and teaching" => "Planning and overview" => "Your timetable"
KA i Økonomi => "Kurser og undervisning" => "Planlægning og overblik" => "Dit skema"

Timetable and venue:
To see the time and location of lectures and please press the link under "Timetable"/​"Se skema" at the right side of this page (F means Spring)

You can find the similar information in English at
-Select Department: “2200-Økonomisk Institut” (and wait for respond)
-Select Module:: “2200-F22; [Name of course]”
-Select Report Type: “List – Weekdays”
-Select Period: “Forår/Spring – Week 5-30”
Press: “ View Timetable”

Please be aware:
- The schedule of the lectures can be changed without the participants´ acceptance. If this happens you can see the new schedule in your personal timetable at KUnet, in the app myUCPH and through the links in the right side and the link above.
- It is the students´s own responsibility continuously throughout the study to stay informed about their study, their teaching, their schedule, their exams etc. through the curriculum of the study programme, the study pages at KUnet, student messages, the course description, the Digital Exam portal, Absalon, the personal schema at KUnet and myUCPH app etc.
  • Category
  • Hours
  • Lectures
  • 42
  • Preparation
  • 161
  • Exam
  • 3
  • Total
  • 206


Feedback is obtained throughout the course in the following ways: (a) the lecturer answering questions in class or in direct connection to lectures; (b) written feedback to each student on submitted homework assignments; (c) individual meetings between lecturer and student during office hours (TBA).

7,5 ECTS
Type of assessment
Written examination, 3 hours under invigilation
as an ITX-exam in the exam venues of the university.

The exam assignment is given in English and must be answered in English.

Changes due to Coronavirus:
In the event that COVID-19 restrictions may affect the conduction of the ITX-exams, the written exam and the re-sit exam will be changed to a 3 hours take-home exam with all aids. If done so, the changes will be announced in study messages at KUnet and in the Digital Exam portal.

The take-home exam is an individual exam and it is not allowed to communicate with any one about the exam assignment nor the solution at all. It is also prohibited to distribute data and other information at all. If this or alike actions happens, it will be regarded as cheating and plagiarism.
Exam registration requirements

To qualify for the exam the student must no later than the given deadlines during the course:

  • Hand in and have approved 2 out of 2 mandatory assignments.
  • The assignments consist of either an empirical application related to the curriculum or a theoretical analysis of a model included in the curriculum.


Please be aware that:
• The assignments are prepared in groups of up to four students but must be handed in individually by each student. Students are responsible for their own solution.
• The plagiarism rules must be complied and please be aware of the rules for co-written assignments.



No aids allowed at the written ITX-exam.


If the ITX-exam is changed to a take-home exam due to COVID-19, the written take-home exam will be with all aids.


Information about allowed aids for the re-examination, please go to the section "Re-exam".


Marking scale
7-point grading scale
Censorship form
No external censorship
at the written exam.
The written ITX-exam may be chosen for external assessment by random sample.
An oral re-examination may be with external assessment.
Exam period

The regular exam takes place:

8 June 2022


Exam information:

The exact time and place will be available in Digital Exam from the middle of the semester.

The Department can change the exam to another type, day, time and place than announced. 

More information about examination, rules, aids etc. is available at Master(UK) and Master(DK).



The written reexam takes place:

17 August 2022



If few students register, it might change to a 30 minutes oral examination without preparation time.

No aids allowed during the examination.


Due to COVID-19, the re-sit might change to 30 minutes oral ONLINE exam with all aids, without preparation time.


Exact type, day, time and place is available in Digital Exam in August.

The Department can change to another type, day, time and place than announced.

More info: Master(UK) and Master(DK)

Criteria for exam assesment

Students are assessed on the extent to which they master the learning outcome for the course.


In order to obtain the top grade “12”, the student must with no or only a few minor weaknesses be able to demonstrate an excellent performance displaying a high level of command of all aspects of the relevant material and can make use of the knowledge, skills and competencies listed in the learning outcomes.

In this course the student should also be able to independently analyze movements in actual exchange rates using economic theories discussed during the course. This includes the analysis of extended theoretical models covered in the course.


In order to obtain the passing grade “02”, the student must in a satisfactory way be able to demonstrate a minimal acceptable level of  the knowledge, skills and competencies listed in the learning outcomes.