Currency calculations

CFA Level I Quant
#1

Hello All,

This thing is really confusing me.

On one hand, when we say GBP/USD 1.7, it means that 1USD = 1.7 GBP. (as per CFA)

On the other hand, for calculating Forward (future) exchange rate, quoted as domestic/foreign currency, the formula is:

Fdc/fc = DCfuture /FCfuture; …equation(i)

where,

Fdc/fc = Forward (future) exchange rate, quoted as domestic/foreign currency;

DCfuture = future domestic currency

FCfuture = future foreign currency

Why so? I am not able to understand the two sides.

For instance, if Fdc/fc = 2, then as per the first rule (i.e. GBP/USD 1.7 means that 1USD = 1.7 GBP) 1FCfuture must be equal to 2 DCfuture. Isn’t it? However, this is inverse of what’s written in equation (i), which states that 1 DCfuture = 2 FCfuture (after substituting Fdc/fc = 2).

I am not able to understand this logic. I have spent close to 1 hour on this. I am still nowhere. Can someone please help me?

Best regards

#2

That’s weird.

I’d love to see the original text on that.

#3

Hello S2000magician,

Thank you for your response. The borrowed stuff is also in your article, which is what CFA also states.

Article supporting currency forwards example:

http://financialexamhelp123.com/covered-interest-rate-parity-irp-pricing-currency-forwards/

Article supporting equation (i) in my example:

http://financialexamhelp123.com/currency-exchange-rates/

Hence, I know that I am definitely making some mistake.

Best regards