error Qbank question? real exchange rate

CFA Level I
#1

Hi everyone,

I am very confused about a question from the Qbank schweser:

[Question and answer removed by admin]

So for me, there is something inconsistent with the explanation and more precisely with the last sentence. In the real exchange formula, they state that EUR is the foreign currency (I agree with that), but then, suddenly, it became the base currency… why?

I would have said that the correct answer is 3. USD/EUR has increased from 1.32 to 1.3288, which means 1 USD can buy more EUR than before, which means the USD has appreciated againt the EUR, and that goods in the USD are more expensive to eurozone consumers.

Your help would be much appreciated.

#2

I see you got the interpretation of the exchange rate wrong.

For CFAI USD/EUR = 1.32 means that you need 1.32 US dollars to buy 1 Euro. So when the exchange rate goes from 1.32 to 1.3288 the euro has appreciated (bacause it is more expensive in terms of US dollars) and hence the USD has depreciated.

This is why the goods on the eurozone are more expensive in real terms to US consumers now.

Hope this helps!

#3

Was right by the way :slight_smile:

#4

Didn’t know if it would create some confusion. I figure the OP will ask again if more explanation is needed. wink

#5

Hi Harrogath,

Yes indeed my understanding was wrong. I got very confused by the below link:

http://www.investopedia.com/university/forexmarket/forex2.asp (where is the inverse)…

Actually, it’s very confusing for me to know which understanding/reading from these quotes is the correct one.

#6

Yep, 5 seconds were enough to realize Forex uses the quotations reversed. I have never used Forex for anything, so didn’t know. It is better to follow the CFAI convention because the exam will be that way. I remember the CFAI book talks about both types of quotations, however CFAI uses “price currency / base currency” nomenclature.

Both ways are right and used in the real world by the way.