Decided to take on level 2, again. Still having problems with exchange rates and their notation. Is there a rule of thumb or anything of the sort on the order of currencies (EUR, GBP, USD are mentioned in the curriculum) when calculating cross rates?
Example. If EUR:USD, USD:YEN and USD:CHF are given, calculating EUR:CHF and EUR:YEN is not an issue, but why is it YEN:CHF and not CHF:YEN?
There is a customary order that I read in Level III, but I don’t recall it immediately.
Is there some reason that this is a concern? If you know JPY:CHF, then you know CHF:JPY (it’s the reciprocal of JPY:CHF); furthermore, there’s no reason that they couldn’t ask you for either one on the exam, so you should be able to do it either way.
Thanks for helping out. My concern is that there’ll be a question where I’ll need to know the correct order with both JPY:CHF and CHF:JPY listed in the answers.
There is a practice question in my previous curriculum where the correct answer was YEN:CHF and my answer was CHF:YEN. I tried to look for an explanation to the CFA order of currencies but couldn’t find one.
Strike that, I reread your question and I see you are asking about currency pair conventions. Seems odd that CFA would test on this, but I am only part way through econ so maybe this is covered later on. Anyway, I found this:
Remember it depends on which side of the transaction you are working from.
If an investor has EUR and wants to convert to USD, he can SELL euros at the USD/EUR bid price. This is how much the dealer is willing to pay for euros in exchange for dollars (bid price of the euro). OR, he can BUY dollars at the EUR/USD ask price. This is how much the dealer is willing to sell dollars for in exchange for euros (ask price of the dollar). The result is of course the same.
I cannot imagine that there would be such a question: that’s not the point of exam (or of the curriculum). They want to know if you can compute the correct number(s), using the correct bid or ask rate.
“Where a rate for a currency pair is quoted as CCY1/CCY2 = X, X represents the number of units of CCY2 that one unit of CCY1 is worth.”
In the CFA material this is never the case, all quotes are CCY1 per CCY2. i.e. CFAI goes against market convention. I think I had the same issue as you on the example question, however I’d think it would be odd if such a question came up in the exam. ( see also my question about quote basis from last week).
In the article I wrote about currency exchange rates, http://financialexamhelp123.com/currency-exchange-rates/, I mention this very fact: that CFA Institute’s convention is the opposite of the market’s convention. Alas, there’s nothing we can do about it: for the exam, you have to adopt CFA Institute’s convention.
This is excellent, thanks. I haven’t had issues with the rest of the curriculum, including economics. But I do recall how it felt when my answers to the FX questions started to fall apart during the exam as my calculations didn’t match those listed in the answers. This is why the order of currencies in the practice question started to bug me.
I’ll try to give this part a fresh start and use CFA’s notation. And understand it, too ;).