Part V · Commodities, macro and geopolitics · M11 · week 7 · 22 h

Macro: rates, FX and flows

Bond maths, duration and convexity, real rates and the yield curve, the Taylor rule, RBI and Fed transmission, interest parity and the carry trade, the dollar and the rupee, foreign flows, and regimes.

Start reading · Learning outcomes

Builds on M02 Statistics of returnsM06 ValuationM07 Forwards and futuresM10 Commodities

Prerequisites M02 (returns, regression), M06 · 6.2 (Gordon growth model), M07 (cost of carry, forwards), M10 (crude and gold drivers). Maths: Taylor expansion, root finding, OLS and its sampling distribution, difference equations. Time: ~22 hours (notes 12 h, problems 6 h, code 4 h). Primary texts: Fabozzi, Bond Markets, Analysis and Strategies (chs. 2–4); Hull, Options, Futures and Other Derivatives (ch. 4 on interest rates, ch. 5 5.10 on currency forwards); Krugman, Obstfeld and Melitz, International Economics (chs. 14–17 on exchange rates); Walsh, Monetary Theory and Policy (ch. 8 on policy rules).

Every changeable fact here (policy rates, yields, exchange rates, flows) is dated. Labels: [V] means checked against a primary or reputable source on or near 6 Nov 2026. [S] means it comes only from a secondary or aggregator source, so treat it as indicative.

Learning outcomes

Price a fixed-coupon bond, solve for its yield to maturity, and prove the yield is unique.
Derive Macaulay duration, modified duration and convexity. Use the second-order approximation to estimate a price change, and bound its error.
Derive the duration of a Gordon-growth equity, $1/(r-g)$ . Use it to explain why growth stocks, long bonds and gold fall when real yields rise.
Decompose a nominal yield into real yield and breakeven inflation. Explain what a yield-curve inversion does and does not tell you.
Compute Taylor-rule prescriptions for the Fed and the RBI from dated inputs, and state the Taylor principle with a stability proof.
Derive covered interest parity as a no-arbitrage result, including bid–ask bands. Detect an arbitrage, and explain the Fama regression and why uncovered parity fails.
Explain the drivers of USDINR: oil, the current account, portfolio flows, RBI intervention and reserves. Trace a Fed or oil shock through to the Nifty.
Place a macro environment in Dalio's growth–inflation quadrants, and say where that mapping has failed (2022, March 2026).

Sections ≈ 3 h 35 min of study

Foundation 6 sections · ≈ 45 min
Core 12 sections · ≈ 2 h 25 min
Advanced 3 sections · ≈ 25 min

Learning outcomes Foundation 5′
11.1 Time value of money, bond pricing and yield to maturity Core 10′
11.2 Duration Core 5′
11.3 Convexity and the second-order approximation Advanced 10′
Figure Bond price against yield: duration and convexity
11.4 Why long-duration assets are rate-sensitive: equities and gold Core 10′
11.5 Real and nominal rates; the yield curve Core 10′
Figure Yield-curve shapes and the forward curve
Lab The US yield curve and its inversions
11.6 The Taylor rule Core 15′
Figure The Taylor rule and the Taylor principle
11.7 Monetary transmission: RBI and Fed Core 15′
11.8 Covered interest parity: derivation and arbitrage Core 10′
Figure Covered interest parity and its no-arbitrage band
11.9 Uncovered interest parity, the forward premium puzzle and PPP Advanced 10′
11.10 The dollar: DXY composition and the dollar smile Foundation 5′
11.11 The rupee: drivers and the 2026 record low Foundation 10′
Lab USDINR and crude oil
11.12 FII/DII flows and the Nifty Foundation 10′
11.13 Dalio's economic machine and the four regimes Core 10′
11.14 Inflation and equity valuations Advanced 5′
11.15 The current state of the world (as of 6 Nov 2026) Foundation 5′
11.16 Case studies Core 15′
11.17 Exchange-traded currency derivatives: USDINR futures and options Core 35′
Summary of key results Foundation 10′
Readings and resources Core 5′
Facts that change Core 5′