Basic: FX quotation in words, order of the currency

CFA Level II Quant
#1

Hi guys,

From notes, the question reads:

“Euro relative to USD under uncovered interest rate parity”

So the currency quotation asked in the question is: USD/EUR, where EUR is the base currency right?

Thus, if I say: Japenese Yen RELATIVE to Canadian Dollar under PPP"

–>CAD/JAY

#2

before trying to answer the question you should clarify if you want the answer in real world FX notation (ccy2perccy1) or CFAI is so special backward notation.

#3

Hi only

how does the real world FX notation work. I have no experience in the FX market. I am highly interested.

And the statement above is a reference to the level 2 circumlum.

#4

That’s how I’d interpret it.

#5

You are always the savior of this website.

#6

Euro relative to USD. The market convention for this pair is “EUR/USD” (go to any fx website/news channel and you’ll see this is about 1.34).

quote basis is ccy2percc1 1. so read this as “USD per EUR”. ( you can buy 1.34 usd with 1 euro).

But that’s the right way, now we switch to the ‘CFA way’ - quotes are done using ccy1perccy2. So we want it to read “EUR per USD”, which means “EUR/USD” but the rate is 0.744.

For the JPY case yen relative to CAD, it will read “JPY per CAD” so JPY/CAD (remember ccy1perccy2), and the rate is around 93.94.

good luck.

#7

It is neither the _ right _ way nor the _ wrong _ way; it’s simply the convention that the market has adopted. It’s no different from adopting a convention to drive on the right side of the highway or the left side of the highway; neither is inherently right or wrong, but countries adopt one convention and stick with it.

And if you don’t want to crash (whether on the highway or inthe forex market), you’d better adopt the prevailing convention.

Personally, I think that the market’s convention makes less sense than CFA Institute’s convention, but the market hasn’t yet developed the sagacity to know that it should listen to me. One can but hope.

#8

If it’s any help to the OP I think this is the book the text is from,

http://www.amazon.co.uk/International-Investments-Edition-Bruno-Solnik/dp/0321204603

fwiw I think you’d need to try pretty hard to find another textbook using this notation.