Hi, although I read the currency stuff several times now, I am still confused with the effects of curreny appreciation and depreciation. I just can`t remind when I loose money. If currency rates are quoted, I can calculate the effects. However, in some exams questions appeared where my home or the foreign currency depreciated or appreciated and I have problems to remind the effect on my domestic currency reurn (gain or loss). Is there any good rule of thumb, where I can remind me this stuff for tomorrow? Thank you very much in advance Greg
You have an exchange rate quoted as X/Y… All you need to do is look at what’s at the bottom, in this case Y. If X/Y goes up then Y appreciated… If X/Y goes down then Y depreciated…
Isn’t it the opposite? If it costs $1.50 to buy 1 GBP, therefore $1.50/1GBP, and then the exchange rate changes such that now it costs $1.00 to buy 1GBP or $1.00/1GBP (or alternatively, $1.50 / 1.50GBP), effectively the “Y” has gone up, but “Y” has depreciated because it’s cheaper to buy now. Or did I misunderstand your explanation?
In your example, the $ has appreciated and hence the GBP has depreciated. The exchange rate went from a high to a low number which means that whatever was in the denominator has depreciated. i.e. GBP. Which ties up to my illustration…
I always look at it this way: Think of 1.33Euro/ as 1.33 Euro to 1 Dollar. If the spot rate goes to 1.35/ than it takes more Euro to buy one dollar hence the Euro has depreciated against the dollar. If the spot rate goes to 1.3/$ than it now takes less Euro to buy one dollar hence the Euro has appreciated versus the dollar.
Well Explained, mate !
The “price” of a currency (numerator) tells you if you’re gaining or losing on the trade.
If your price has gone up, you’re losing if you “bought” (rebuying domestic to close your position is more expensive, more local to buy fixed unit of domestic))
If your price has gone down, you’re gaining if you “sold” (rebuying domestic is more cheaper, less local to buy fixed unit of domestic)
Buy USD/CHK 1.07
Buy 1 CHK
Sell 1.07 USD
USD/CHK moves to 1.09 -> close position
Sell USD/CHK 1.09
Sell 1 CHK
Buy 1.09 USD
1.07/1.09 - 1 = -1.8%
I hope that’s right!
Think of currencies as commodities. (They are.)
If a currency appreciates, its price goes up; if it depreciates, its price goes down.
Suppose that GBP appreciates vis-à-vis EUR. Then it takes more EUR to buy one GBP: EUR/GBP increases; GBP/EUR decreases. EUR has depreciated vis-à-vis GBP.
What I still sometimes find confusing is, say a quote of GBP/USD is 1.5, which in currency terms means # of USD/ 1 GBP; however algebraically the quote of GBP/USD ACTUALLY means: # of GBP/ 1 USD.
The rule though is: Currency Quotes - the 1st currency in the base currency & in algebra the base is the denominator.
Direct Quote= Foreign Currency is the Base Currency (eg EUR/USD for a US investor)
Indirect Quote = Home Currency is the Base Currency (eg GBP/USD for a UK investor)
CFA Institute’s convention is USD/GBP 1.5253 means $1.5253 = £1.0.
This has been CFA Institute’s convention for quite a while now.