Is USD always the local currency and other the foreign currency?
Or, the currency that is translated to get merged into the accounts of parent is the foreign currency? The example given in the Schweser on Pg 135 is causing all the confusion. On Page 140, while analyzing the reason for the differing net income under the two methods, the first point is “income before translation gain/loss is different between the two methods” - This point makes a mention of depreciating local currency! And as can be seen, the exchange rate changes from $0.5 = 1 Loca to $0.4545 = 1 Loca. This shows that the currency depreciating is Loca, Thus, It can be concluded from the above analysis, and the facts that Loca is the local currency Now, come to Pg 143, which makes an analysis of the mixed ratios. Here, the ratios are increasing, and the reason written is "This will always be the case when the foreign currency is depreciating! But in the previous analysis, the local currency was depreciating. How can the different terms (local / foreign) be used for the same depreciating currency? Grateful if someone can throw light! Darn!
The foreign currency is the original currency. The domestic currency is the one you are converting it into. I think you may be confused by domestic and local. Both are different. Temporal method : L->F=P Current rate method : L=F -> P Or you can draw that nifty schweser diagram which shows which conversion and what method. And write foreign on the side before the conversion. It will be clearer to you once you see it visually represented.
Hope everyone is staying safe!! Question regarding local currency and how to know if it is appreciating or depreciating. On page 89 of the 2020 version of Schwesser the question lists USD/ LC as 0.4545 on December 31, 2015 and USD/LC as 0.4000 on December 31, 2016. Since USD is the base currency how is it that the local currency is depreciating when it now takes less LC to buy 1 USD?
I’m pretty sure LC is the base currency rather than USD. In the real world the quote would be like this “LC/USD” means one LC equals to USD 0.4545. But in the book, they use the currency pair as “USD/LC” (\frac{USD}{LC}) which means one LC equals to USD 0.4545. I know this is nuts. But only academia use it that way.
Hope all is well with you. Another question for you. Regarding Acquisition Method, how do you know when to add % not owned * NI and subtract % not owned * divs of the acquired company from the Acquiring Company’s minority interest? For some questions it appears you are supposed to add and subtract these numbers and in other problems you simply multiply the percent not owned * the equity of the acquired firm and ignore both divs and net income?