Level II, Vol 6, Reading 52, page 132, Solution to EOC question 12. Can anyone, please, tell me why the 1.0417 is in the numerator term? Per the question, “Axia is headquatered in Germany and reports its financial statements in euros(EUR)”-Ref CFA curriculum, page 124. This implies, the 4.17% U. K. interest rate is the foreign interest rate. So why is the 1.0417 in the numerator term and not in the denominator term? Is it because of the way the exchange rate is quoted-(GBP/EUR)?
It makes no difference which currency you call “domestic” and which you call “foreign”. What matters is that you match the interest rate with the correct currency. If you have GBP in the numerator in the exchange rate quote, then you must have the GBP interest rate in the numerator. If you have EUR in the denominator of the exchange rate quote, then you must have the EUR interest rate in the denominator.