$1.2/GBP.
Which is domestic and which is foreign? As with most things deriviatives, this feels backwards to me.
Whichever one you want is domestic, and the other is foreign. It makes no difference.
Note that for many formulae (e.g., valuing a currency forward), the quotes are generally given as (dc/fc) (so, in that case, your quote has USD as dc and GBP as fc), but that’s specified only to make the formula understandable; it’s not necessary.
Rather than try to memorize which is foreign and which domestic, you’re much better off understanding what the formula is doing; that way, when they give you GBP0.8333/USD, you can still work the problem and get the right answer.
Thanks a lot for the reply. The reason why the question arose was pricing a currency forward contract.
spot price * 1+RF(domestic)^t/T/1+RF(foreign)^t/T
Can you help me understand the formula? As you say “what the formula is doing”?
Thanks.
You always keep the numerator in the numerator and the denominator in the denomitor for all but one of these currency formulas. So if you are looking for an answer that is “USD/GBP” the USD is the domestic and GBP foreign.
Which currency formula does domestic go in the denominator? Valuing a currency forward?