in current method: why operational effect= change in operating income *previous year average exchange rate, why use previous year average exchange rate? Thanks.
Because your trying to measure the effect of the subsidiary’s change in operating earning/revenue/sales than the effect of exchange rate change.
translated income this year: NetIncome*AverageRate Last year: NetIncomeLast*AverageRateLast difference = NetIncome*AverageRate - NetIncomeLast*AverageRateLast = (NetIncome*AverageRate - NetIncome*AverageRateLast) +(NetIncome*AverageRateLast - NetIncomeLast*AverageRateLast) = NetIncome*(AverageRate - AverageRateLast) + (NetIncome-NetIncomeLast)*AverageRateLast = exchange effect + operational effect
dumb question here, but did schweser cover this? if so, what page? i was so focused on holding effect and flow effect during my studies, i was thrown off when they asked about operational effect. this is how i bombed fsa in the first sample…
i came up with that derivation but Secret Sauce reviews exchange effect and operational effect.
it does? i must have just missed it. thanks maratikus.
cfasf1 Wrote: ------------------------------------------------------- > dumb question here, but did schweser cover this? > if so, what page? i was so focused on holding > effect and flow effect during my studies, i was > thrown off when they asked about operational > effect. this is how i bombed fsa in the first > sample… Yes, schweser covered it but there’s a nice review in the sauce as well (actually, that’s where I really learned it) You just have to make sure the I/S amount is in LC and the exchange rate is in LC / $
thx u guys… i love this forum… group thinking more like problem solving… awesome