I would really appreciate it if someone can explain to me in plain and simple form. I’ve done it a million time but today was a bad day for me. When we calculate the flow effect and holding G/L effect, how do we determine if the rates should be used as they are given or take the reciprocal? In other words, when do we use the rate as LC/FC or v.v Thanks in advance
If the exposure is in LC, you use RC/LC (think the LC’s cancel and you are left w/just the reporting currency). So if the exchange rates are given in LC/RC, you take the reciprocal. If give in RC/LC, you just use that.
all you have to think about is the following let’s say reporting currency is the dollar and the local is the euro you know your statements are in euros so you need to translate to dollar. that means you need an exchange rate that shows you how much dollars you get per one euro therefore $/euro is what you are looking for
if you need to translate to the exchange rate needs to have on top and the euros would reduce themselves I think it’s quite logical
euro* /euro= = happiness
If you are at ease with maths, see it the following way: a quote of 1.2 DC / FC can be read as DC “divided by” FC if I give you 100 DC and you want to convert it to FC, the only way to eliminate the DC is to divide it by DC (as in a ratio) So to convert 100 DC to FC, you have to take the quote as FC “divided by” DC, which is the reciprocal, so that the DC are simplified: 100 DC * 1/( 1.2 DC per FC) = 100 DC * 0.83 “FC divided by DC” = 0.83 FC Not sure it’s easier, but I tried
florinpop Wrote: ------------------------------------------------------- > euro* /euro= = happiness Can I question this statement? 
you can. not that it would help happiness comes from solving the problem not from the dollars although I wouldn’t mind some
If I were to choose I would prefer Euros… but you are right, it does not help here
I’ll take the dollars buy low sell high
Thanks a lot guys … .wow didn’t expect to get all the responses. I’ve done all three schweser exams and schweser concept checkers and got them right. what got me confused was the question in the CFAI from 2006. I looked it and it still doesn’t make sense. The rates don’t look right at all. Not sure if anyone noticed it. it seems like with the exam getting closer, i have days where i feel like i’m gonna get 80% and other days i feel like i will fail it. 10 more days to go, keep it up guys.