When answering PPP, exchange rate questions, etc., I get most of them right. But when the answer is explained it always seems the DC/FC are different than what I thought. Any tips on determining DC vs FC? Base vs. Counter is easier for me, but Schweser has a lot of DC vs. FC…
Base = DC Counter = FC
Topher, that’s what I thought too, but I seem to have run across some Schweser examples that contradict that. Or, my eyes are glazing over and I’m seeing things. I’ll see if I can find an example…
DC/FC = FC:DC … schweser and cfai have different ways of refering to the direct exchange rate i have found… topher is right DC is always base
Schweser quote: “Direct foreign exchange quotations are in domestic currency per unit of foreign currency. They are from the perspective of the counter currency. For example, in the quotation AUD:USD = 0.60, the base currency is AUD and the counter currency is the USD. The quote is a direct quote to a U.S. investor. It tells him the cost of one AUD in his domestic currency. This quote may also appear as USD/AUD = 0.60.” So, Base:Counter = DC/FC. FC is the “Base”. For this reason, I will stick to DC/FC quote.
Check this out, unless I’m mistaken, the question is USD/MXN which makes MXN Base/DC and USD Counter/FC: Consider a forward contract on 1 million Mexican Pesos at $0.08254/MXN. 60 days prior to expiration the U.S. risk-free rate is 5%, the Mexican risk-free rate is 6%, and the spot rate is $0.08211/MXN. The value of the contract to the long is closest to: A) $553. B) -$297. C) -$553. The correct answer was C) -$553. The formula is: Vt = St / (1 + Rfor)(T − t) − FT / (1 + Rdom)(T − t) . The value is 0.08211 / 1.0660/365 − 0.08254/1.0560/365 = 0.08132763 − 0.08188065 = -0.00055302. The answer is in USD/ Peso, because when multiplying by Pesos, the answer is in USD. 0.00055302 × 1 million Pesos = -$553.02.
deriv108 Wrote: ------------------------------------------------------- > Schweser quote: > > “Direct foreign exchange quotations are in > domestic currency per unit of foreign currency. > They are from the perspective of the counter > currency. > > For example, in the quotation AUD:USD = 0.60, the > base currency is AUD and the counter currency is > the USD. The quote is a direct quote to a U.S. > investor. It tells him the cost of one AUD in his > domestic currency. This quote may also appear as > USD/AUD = 0.60.” > > So, Base:Counter = DC/FC. FC is the “Base”. > > For this reason, I will stick to DC/FC quote. So you’re completely opposite of what Topher says. Have you seen any contradictions since using DC (Counter)/FC (Base)?
I just calc’d this and got the right answer. V = S/(1+RFC)^(T-t) + FP/(1+RDC)^(T-t) = 0.08211/(1.06)^(60/365) – 0.08254/(1.05)^(60/365) = -0.000553 (/MXN) On 1,000,000 MXN =\> -0.000553/MXN * 1,000,000 MXN = -$553 Let’s see. First thing I notice when I see this problem is that both the quoted spot and forward rates are xxxx/MXN. To me that means DC=, FC=MXN. Whenever you see spot/fwd rates, you should just automatically put it into your mind: S(DC/FC) and F(DC/FC). From there you just plug and chug.
But, that is still saying FC is the Base currency–as opposed to your original comment, correct?
I see what you are saying. Forward: 0.08254/MXN is the same as MXN:USD = 0.08254 and the conventional quotation is BC:CC. BC and CC DO NOT necessarily convert nicely into what I said before. BC is not necessarily DC and CC is not necessarily FC. The domestic currency can be either or MXN, depending on if you’re looking at the above expressions as direct or indirect quotes. The above quote is a direct quote to a USD investor, so that would make USD the domestic currency. But to do this problem, you don’t even need to start with the whole BC:CC talk in your head. As I said above, when I see spot or forward rates, I automatically think that the numerator is DC, and the denominator is FC, and then just plug in numbers for the formula.
As long as the result is correct, either will work for the exam.
Direct quote: DC/FC is easy to memorize. So is: Vt = S/(1+rFC)^(T-t) - F/(1+rDC)^(T-t) like topher said. I will convert it to direct quote whenever I see quote like Base:Counter Currency.