Cross Currency Rate Difficulty

CFA Level I
#1

I hate currency quetions. I can’t get my head around them and not sure I will in time for the exam.

I have a question which I always seem to do a 50/50 guess on.

Say you have the following:

USD/EUR = 1.3250

CHF/EUR = 1.2090

How much CHF woud you obtain for USD 120,000 ?

I understand this is a cross rate question. In the textbooks there are two ways you can go about this depending on certain factors,

One way: 1.3250 x 1.2090 x 120,000 = 192,231 INCORRECT

Second way: 1.3250/1.2090 x 120,000= 131,513 INCORRET

Third way: 1.2090/1.3250 x 120,000 = 109,494 CORRECT

How do you know whether to multiply it or divide it and which way round to divide?

Can anyone also share any easy tricks to remember currency calculations such as this and others?

Thanks!

#2

Currency questions are pretty simple once you understand the notations man.

Ignore the number and just look at the notations: to find out how much chf you get for usd, you first need to find CHF/USD which is the amount of CHF you get FOR ONE US DOLLAR.

since the currencies are in terms of EUR: CHF/USD = CHF/EUR x EUR/USD

so basically, the EUR cancel each other out and what you get is CHF/USD

from the question, you know what CHF/EUR is, so now you need to find EUR/USD. This of of course is equivalent to 1/(USD/EUR) = EUR/USD

So basically, CHF/USD = (CHF/EUR) x 1/(USD/EUR) = 1.2090/1.3250 = 0.91245

So for 120000 USD, you’ll get 0.91245 x 120000 = 109494.34 CHF

Get it?

#3

Yeah I think I got it bro thanks, can you run through one more example say with 3 rates in it? Or just another with 2 rates?

#4

it clicked man!

I just tried one with three rates and think i got it. Your explanation made it really clear. didnt think about it as cancelling the common terms out!

Cheers my brother from another mother.

#5

I always solve these types of questions without the numbers first.

In this case you need to find how many CHF you would get for one USD. So, the USD would be in the denominator. Essentially, need to find CHF/USD exchange rate.

Now, seeing you have USD/EUR and CHF/EUR to work with, you have to manipulate them to get CHF/USD.

This will happen if you rearrange the equation in the following way:

CHF/USD= (EUR/USD) x (CHF/EUR). (1/1.3250) x (1.2090)

The EUR will cancel and you’ll be left with CHF/USD.

#6

Yeah I got it mate. You’ve helped hugely so thank you.

Could I also ask what a rational way to thinka bout currency depreciation is for exports and imports. Say if your currency depreciates, does that mean that foreign units now buy less domestic currency so therefore your exports decrease?

This whole part of Economics really goes over my head.

Thanks

#7

Just think about it logically man, if you currency depreciates, it declines in value making iit worth less.

Therefore, imports become more expensive and conversely, your exports become cheaper for the country whose currency appreciates against yours.

Basically, your currency buys less of the foreign currency and the foreign currency buys more of yours when your currency depreciates.

So exports increase and imports decrease; look up the j curve effect in the books, relates to this

#8

cool thanks

#9

I wrote an article on this that may be of some help: http://financialexamhelp123.com/currency-exchange-rates/.