Schweser wrote on page 252: “It may be helpful to keep in mind that when we talk about currencies in general, most statements are about the base currency (the currency in the denominator). For example, when the USD/EUR changes from 1.30 to 1.20, we say that the euro (i.e. the base currency) depreciated.”
Comments; This is clearly wrong. This should be a USD depreciation, as the euro has gained in strength and can buy more USD. What are these chaps on about?
Someone tell me I’m crazy. This should be common knowledge stuff.
This should be common knowledge stuff. I struggled with this common knowledge stuff initially!
BEFORE: USD/EUR = 1.30, means 1 EUR costs USD1.30
AFTER: USD/EUR = 1.20, means 1 EUR costs USD1.20, meaning 1 EUR has now become cheaper to buy by paying USD0.10 less. Therefore, EUR has depreciated relative to the USD.
where EUR is base currency, USD is price currency.
CFAI seem to quote FX in a strange way which might be why you’re getting confused. They are clarifying that the EUR is the base currency, which would mean that the USD is the quote currency in this example. Therefore, if it requires USD1.20 to buy 1 EUR, when previously the quote was 1.30, then the USD has appreciated against the EUR (or the EUR depreciated against the USD, whichever way you want to address it).
Super annoying convention, just need to keep this in mind.
In my personal opinion the way CFAI quotes exchange rates is more intuitive than the “common” quoting.
USD/EUR = 1.2 can be easily read as “I need 1.2 us dollars to buy 1.0 euro”.
Aaaaand… from the math perspective… a fraction is very meaningless in its structure. For example 4/5 means 4 out of 5, 4 parts from a total amount of 5 parts, only 80%, etc. The same reasoning for 7/5 for example.
If we were to interpret 4/5 as 5 out of 4, my world would crash sincerely.
The fact that CFA Institute quotes it differently than the real world does is annoying to those who deal with currencies in the real world, but that doesn’t make their way stupid; it’s actually more sensible.
