Exchange rate quotes

FRM
#1

Hi,

I’m really confused about exchange rate quotations. Sometimes 1.2 Currency1/Currency2 means 1.2 Currency1 = 1 Currency2, sometimes it means 1 Currency1 = 1.2 Currency2. Does anyone know which one GARP uses the most?

#2

Can you explain this with real currency pair example because GARP currency quotations cannot be different

#3

Sure. In this year’s practice exam exchange rate for IRP exercise is given as 1.25 USD/EUR. Wiley would use 1/1.25 USD/EUR. It is pretty obvious in this specific case, what is the exchange rate but what if the currency pair was different?

#4

Forex maktes most currencies are traded against USD therefore base currency in the pair is USD.This type of quotes are called DIRECT quote.Ex. USD/JPY,USD/CAD,USD/INR.Direct currency quote simply a domestic currency is the quoted currency. For currencies GBP,AUD,NZD,EUR(four major currencies) quoted other way as USD as the counter currency. Ex. GBP/USD,AUD/USD,NZD/USD & EUR/USD this is call indirect quote.

Your example- USD/EUR 1.25 means that 1 USD equals 1.25 EUR.

USD/EUR=1/1.25=0.80 this means 1 USD will purchase 0.80 EURs.Indirect quote.Usually in Forex markets USD & EUR currency pair is quoted as EUR/USD as mentioned above but pay attention to the order it was written to solve problems.

#5

I have a very simple trick to understand this - See how many units of domestic currency equal ONE unit of foreign currency.

  1. 70 INR/USD: Domestic is INR and Foreign is USD (1 unit of USD, hence foreign currency)

  2. USD/GBP 0.69: Domestic is GBP as 0.69 units of GBP equal 1 unit of USD.

Hope that helps :slight_smile:

#6

How do you segregate foreign and local currency? ex DKK/NOK

#7

More than anything it depends on the question. If the fund manager / corporate is based in norway, NOK is your domestic curreny. In most cases you will have USD as domestic.

The curreny quotes have always been confusing. Look for as much help in the questions.

#8

I asked that question to show that when someone calcuate using demestic/foriegn currency formula, sometimes confusing to identify the domestic & foreign currency in a question.But when u consider the order the currency pair was written then this issue will not be arisen.