Cross currency appreciation question

CFA Level III Economics
#1

In Reading 24, problem 25 we are supposed to calculate the best carry trade, adjusted for FX changes. In the problem it says this:

“the US Dollar will depreciate by 1% against the Euro, and the British Pound will remain stable versus the Euro”

Then in the solution it says: “this is more than offset by the 1% expected appreciation of GBP versus USD”.

So I am assuming it is OK to says that if USD will depreciated against EUR and GBP will remain stable against the EUR, then it is safe to say that it must be that USD will also depreciate against GBP.

It makes sense to me but I feel more confident to say this by making a cross currency calculation. In this case you cannot do so, and I want someone to confirm me this.

1 Like
#2

Hello

I just had the same confusion. I am not sure if we could say that the same appreciation could apply to GBP versus USD. In the explanation they do not explicitly explain that it should be the assumption.
I wouldn’t be surprised if it was a typo in the problem layout !

#3

Hello,
This is not a mistake - the change is implied. If A appreciates against B while B is stable against C then it is safe to say that A appreciated against C. The same goes if we substituted appreciation for depreciation.