The CFA syllabus teaches Price/Base Currency rates or Foreign/Domestic - but reality is most market quotes seem to be the other way around i.e. Base/Price CCY. For example, GBP/USD is 1.453 right now i.e. 1.453 USD per GBP; or EUR/USD is 1.14 right now i.e. 1.14 USD per €
This did get me confused right at the start of exam prep but i just went with the CFA method for exam purposes. Now, that i’m back to the ‘real world’ - why is there a discrepancy…
Dunno the exact reason but would make a guess. The difference is in the way it’s quoted: they don’t necessarily quote it as EUR/USD @ 1.13 in reality. It looks more like EURUSD or EUR-USD @ 1.13. The CFA version is more intuitive and friendly. USD/EUR is like $1.13 per €1 with the forward slash indicating ‘per’. The real guys may like it looking less intuitive coz reality should look complex isn’t it!!!
Direct vs indirect quotes. Just 2 different ways of saying the same thing (or the inverse of the same thing)
Yeah, the Econ readings use indirect quotes, while the Derivatives readings use direct quotes. I have no idea why the difference exists, other than a difference in the authors of the material. Maybe the authors of the Econ readings felt learning the material using the PC/BC FC/DC quote convention is more intuitive or something.
Many high volume currency pairs have market “conventions” for rate quotes (i.e. Currency A and Currency B are always quoted in terms of A/B). This becomes second nature to FX traders and those dealing with currencies frequently, but to outsiders it would be very easy to be confused if you were expecting to hear/see a rate quote expressed the inverse of the market convention
With all due respect, you’re wrong here.
The quotes throughout the CFA curriculum are consistent: PC/BC 1.2345 means PC1.2345 = BC1.0.
There is no difference between the convention used in Econ and Derivatives (or anywhere else in the curriculum, for that matter).
pheeeew … That’s a relief, all i was thinking was how the **** did i miss that!!!
Sorry, I meant to say FC/DC (my brain is still trying to unwind). Unless I’m crazy, I’m fairly sure the Econ reading uses F/D (indirect) while the Derviatives reading uses D/F (direct) yes?
Heh, this was bugging me so I had to dig up where I remember reading the difference.
In Economics (Reading 13, Section 2.2) the author mentions using (f/d) notation and makes the assumption that the domestic currency is the base currency.
In Derivatives (Reading 44, Section 4.4) the author states “In this reading, we shall always quote exchange rates in terms of units of domestic currency per unit of foreign currency, which is also called a direct quote.”
I think I must be missing the interpretation somewhere (probably in what the Econ author is doing).
As I recall the rational for the direct quote is synonymous with a stock quote, i.e. DC per unit of FC (or stock), for converting foreign rev/exp to domestic currency. The rational for the indirect quotes was for converting one unit of DC in the forward pricing, where one unit of DC is bought/sold forward.
As far as I can tell, there’s no conscious effort in either topic area to put the domestic currency in the numerator or to put the domestic currency in the denominator, mainly because there’s no conscious effort to identify a particular currency as domestic. It’s simply PC/BC 1.2345, where PC can be any currency and BC can be any currency.