Base:Counter (which one is DC, which is FC)

CFA Level II
#1

K, I just LOST it on my practice exams book just now. Practice exam #1, a.m. session, question #40. I answered it thinking that the base currency (USD) is always the foreign currency? Obviously not. Someone help me out here, how do I know what the foreign currency is? Do I just imply it from the question (if it’s a US investor, then obviously the USD is domestic??? Is it that simple???

#2

Counter currency = DC … BCY:CCY is FC:DC Direct quotes are from counter currency perspective.

#3

Base currency and counter currency are always quoted from the perspective of a currency market maker (i.e. the guy who trades currencies), so there isn’t really any differentiation between “domestic” or “foreign”. What matters is what the market maker is interested to trade. e.g. A currency trader in Germany could make a market for USD in exchange for Yen. If the question says it is an US investor, USD would be the domestic currency. Assuming this same investor trades USD to some other currency (says Yen), he would usually quote his rates in the form USD : Yen because his bid / ask rates would be with respect to the base currency.

#4

Counter doesn’t necessary mean DC correct? See my original post…

#5

So, for formulaic purposes, if there is no reference to where the investor is from, how do you know what is DC?

#6

Unless specified otherwise, I would assume the domestic currency is the currency that originates from the investor’s home is using and that he is most interested in. (It’s a bit of comprehension problem; that’s why Econ questions could be pretty easy to some people, but pretty difficult to others. The question could mean something different if you over-read or under-read it.)

#7

hope this helps: as long as you set up the equation right it does not matter…here’s an example If you have the spot rate in X USD per MXN then the domestic currency is the US and you will: multiply X by the US interest rate and divide by the MXN interest rate to get the forward rate in USD per MXN if you start with X MXN per USD the domestic currency is MXN so multiply by MXN interest rate and the rest is the same logic.