So I am struggling with the logic of this question’s answer. In reading the statement for Subscriber #2 it seems to me that the individual is describing a situation where the KRW would be appreciating (drop in exports) and the USD would be depreciating (rise in exports). But the answer on page 299 states that this would result in the KRW depreciating relative to the USD - driving the KRW/USD rate up?
-thanks for any insight
KRW is appreciating.
So KRW / USD would be increasing - since that means that KRW = X USD is rising. [This is the quote # that they are taking about].
Say it was 0.000942 KRW / USD -> so 1 KRW = 0.000942 KRW and now became 0.00095 KRW/USD. So the quote appreciated.
cpk 123, i think if krw/usd is increasing then it would mean that the krw currency is rather depreciating… check your facts.
http://www.analystforum.com/forums/cfa-forums/cfa-level-iii-forum/91328347
this same was discussed in the above.
This is also a reflection of the change in quote methodology from previous years.
I think I am right in what I have stated above.
So after looking at this link I would like to use your example:
"1.3 USD/EUR -> it means 1 EUR (FC) = 1.3 USD
and now if that quote changes to 1.4 USD/EUR -> it means that the EUR appreciated…"
I agree with this logic as it now costs more dollars to buy 1 EUR. So… in the example above from the CFA for the USD to appreciate the quote would go up - meaning that 1 dollar would buy more KWR. - This is basically what the CFA answer text says and how your reply plays out - my problem is with the logic behind what direction the underlying currency will move not the quote. If Korea is seeing a drop in exports and the US is seeing an increase in exports that would lead me to believe that the US should depreciate relative to the KWR, not appreciate. My issue is with their logic - not the quote structure. I say that with it given that I think the quote should move in the other direction… but I agree with the CFA’s projection of the movement if it were the USD that appreciated, I just think that it should be a US depreciation…
the cfa institue is perfectly right both with quote and with description of currency change. rising kwr/usd simply means falling value of the KRW. also falling korean export vis-a-vis rising us export means appreciating USD value relative the KRW.
harryy02-
Can you walk me though the logic on this as this is where I am getting tripped up? My logic goes like this:
If KWR is exporting to JPY (for example) and sees a drop in exports this would lead me to believe that the KWR has appreciated against the JPY. So for the JPY importer if right now it costs about 10.4 JPY to buy 1 KWR worth of goods, maybe (for example) that rate changes so it now costs 15 JPY for 1 KWR – so as the KWR appreciates against the JPY its goods become more expensive and Korea sees exports drop to JPY.
Now assume that USD also exports to JPY. Let’s assume that it takes 103 JPY to buy 1 USD of imported goods. Now let’s assume that the USD sees a rise in exports – to me this would mean that the rate would have to move so that 103 JPY would buy more than 1 USD of goods (maybe a move to 95 JPY for 1 USD of goods) - the goods become cheaper for the JPY importer so he buys more drivng up USd exports.
So in my logic the USD got weaker and saw a rise in exports to JPY and the KWR got stronger and saw a drop in exports s to JPY. Now against each other we have a weakening USD and strengthening KWR. This would drive the KWR/USD rate down…
The CFA says my logic above is wrong and you agree with the CFA so it is likely that I am missing “the big picture” here – can you please point out how / why I have this backwards?
-thanks
isn’t that where you are going wrong?
Originally per your statements: 10.4 JPY to buy 1 KWR, 103 JPY to buy 1 USD
so KWR/USD = 10.4/103 = 0.1009
Later: 15 JPY for 1 KWR, 95 JPY for 1 USD so KWR / USD = 15/95 = 0.1578
So KWR/USD quote appreciated.
CPK -
I still don’t get the logic, please stay patient>
When we started in my example (based more or less on today’s exchanges) we have:
10.4 JPY for 1KWR and
103 JPY for 1 USD
This works out to 9.9038 KWR/USD - the question gives the quote as KWR/USD so I want to keep it in that order…
I get the 9.9 buy converting my 1USD to 103 JPY and then dividing by 10.4 to get to KWR
Now time passes in my example and we have:
15 PJY for 1KWR and
95 JPY for 1 USD
This works out to 6.33KWR/USD - which is a lowering of the quote - not an appreciation
I get the 6.33 by getting 95 JPY for my 1 USD nad then dividing by 15 to get to KWR
that part is right I am wrong.
what you have done above is the right way. But again
An original quote of 9.9 KWR/USD becomes new quote of 6.3 KWR/USD
So USD has actually depreciated, KWR has appreciated.
A quote depreciation does not mean the currency on top (Price currency) has depreciated.
Originally - 1 USD was 9.9 KWR (That is what 9.9 KWR/USD means)
Now 1 USD = 6.33 KWR so you get fewer KWR per USD. (So KWR appreciated, USD depreciated).
So now you are agreeing with the logic in my original post? Namely:
KWR appreciate
USD depreciate
KWR/USD quote down
This is the reverse of the CFA answer and what led me to my original post/confussion? See their answer on p.299 where they state the the KWR should depreciate relative to the USD - the opposite of what we just determined.
Hold on… maybe I am completely off base.
overseas markets for Korean export goods are slowing. This is something you pay for in local currency. So it is more expensive in local currency terms. If the KRW were depreciating wrt the Local currency, only would this happen, wouldn’t it?
similarly US is experiencing a rise in exports. Cheaper to buy it in local currency terms. So USD is appreciating relative to the local currency.
So KRW is depreciating, USD is appreciating, KRW/USD quote would be appreciating.
so the CFA answer is right. And therefore you need to go long a NDF contract.
[Please help me god with this chapter, so many f… nuances every step of the way]. [and potentially I might have gotten this wrong again, so really help me again].
ok - let’s try to work through your logic
Let’s assume the Korean exports are slowing to overseas markets in Japan. Why, well holidgn everything else equal and realizing that in Japan (the local market) the JPY is the currency, the JPY is not buying as much of the KWR as it used to (as you state it is “more expensive in local currency terms”) so they have to spend more JPY to buy the Korean goods… eventally they just switch to some other country’s goods - like the US. This is a result of the KWR appreciating against the JPY not depreciating (more JPY per KWR is KWR appreciating).
Also the US is seeing a rise in exports to Japan becasue the local currency - the JPY - is buying more of the USD - meaning that the USD is depreciating against the JPY (less JPY per USD). You state
“US is experiencing a rise in exports. Cheaper to buy it in local currency terms.”
“So USD is appreciating relative to the local currency”.
-I think this part is wrong - if the USD is cheaper for JPY residents then it would have depreciated against the JPY not appreciated. Cheaper for JPY means that the quote goes from 103 JPY/USD to 95 JPY/USD - or stated slightly differently 1 JPY = 0.0097 USD to 1 JPY = 0.0105 USD. So 1 JPY is now worth more USD - meaning the USD depreciated.
So in local currency terms (Japan) we have the KWR appreciating and the USD depreciating. Thus driving down the KWR/USD quote.
The more I think about this the more I think the CFA is wrong. But I am still waiting on S2000magician to smack me back down - where you at man??? you don’t do currency?
I have agree with Jay. The convention I remember is if KRW/USD is appreciating, then USD (the denominator) is appreciating. However, if KRW-USD is appreciating, it means that USD is depreciating.
Did anyone figure this problem out? Jayman, a few comments and questions for you. The way I looked at this question was if exports are increasing in US, that means other countries are importing from US. They need dollars to buy US product. Demand for USD will cause USD to appreciate. In Korean market, exports are decling, so people are buying less, and thus don’t want KRW, so it depreciates.
Is my logic correct here?
The next part is my hang up. If numerator goes up (appreciates), the equation goes up. (.5/5=.1, 2/5=.4). If denominator goes up, the equation goes down (.5/1=.5, .5/5=.1). If price currency KRW, as CFA states, is expected to depreciate, this means numerator declines (or denominator increases), which should cause equation to depreciate, not appreciate… Is this not correct?