Given in vignette: Parent is a US based company and US is the functional currency. 2007 Exchange Rate: Canadian / U.S. (this is exactly as it's written on page 199) weighted average rate for inventory purchases: .92 rate on 31 December 2007: .95 Inventory in Canadian : 77 Long term debt in Canadian $: 175 The question asks us to translate the inventory and long term debt into the parent currency. ~~~~~~~~ I know that because the parent currency is the functional currency, we use Temporal Method. I know that (in the temporal method) inventory is translated at historical levels, and long term debt is translated at the current year end rate. QUESTION: Somehow, someway: Inventory = $71 Long term debt = 166 My Basic currency thinking: .92 C / 1$ ----> therefore, 77 C$ = 77/.92 = 83.69 US$. Can someone PLEASE explain how they arrived at these answers.
C$ / US$ is Domestic Currency / Foreign Currency = Direct method of quotation. Since C$ is the Domestic currency. So 1 C$ = 0.92 USD Average rate for Inventory = 77 * 0.92 = 70.84 rounded to 71 Long term debt - Monetary Liabilities -> at the Current Rate – in the absence with the Current Rate above - do not know…
CP, thank you for responding. My biggest question is what you answered regarding DC/FC In other questions I went to, I found this: C$ / US$ = .92 Which means .92 C$ per 1 US$ = .92 C$ / 1$ Isn’t that correct? Why for this example does C$/ US$ become 1 C$ = 0.92 USD ? THIS I REALLY DON’T UNDERSTAND. On page 201 the exchange rate is /Euro Total assets is given to be 2300 Euros, and we are asked to translate to the at the current rate, which is:/Euro 1.61 (which means 1.61 dollars per euro) 1.61 / 1 E —> 2300 Euros = 2300 x 1.61 = 3703 dollars (this is exactly what is written in the book, page 201 #16 Please help I'm lost with the currency issues on page 199: Why for this example does C / US$ become 1 C$ = 0.92 USD ? Shouldn’t it be the other way around?
Forget a moment about domestic/foreign. a/b=c => a=b*c . Now, replace a=1C$, b=1US$, c=0.92. 1C$=0.92*1US$=0.92US$ If 1C$ = 0.92US$, 77C$=?
In the first example C$ / US$ = .92 DC = Domestic Currency of Canada - C$ FC = Foreign Currency of Parent = USD They gave you DC/FC = Direct Quotation of C$ in terms of USD. This means 1 C$ = 0.92 In the 2nd example: /Euro 1.61 This is a FC/DC convention. Indirect quotation for Euro in terms of USD. So 1 Euro = 1.61 Yes it is confusing, and this currency conversion business in the CFA material is all confusing, esp. with different conventions for the same thing.. To keep this in sync.. I approximate the following 1 GBP is about 2 1 Euro is about 1.5$ 1 USD is about 100 Yen 1 USD is about 2.5 SFR (Swiss Franc) that kinda tells me… what to do. also if you used 0.92C$ = 1 USD it means the Canadian is stronger than the USD - which might be true today, but at the time the chapter was written - it was not so... (I believe the other way that a Canadian is about 90 cents is about right).
map1 ur method does not work with the euro convention cfa.rhythm has asked /Euro=1.61 so 1 = 1.61 Euro… ???
CPK, thank you for responding, but I just don’t get it. I can answer 25 currency questions from CFAI and Schweser all correctly, but this one, why does the rule all sudden change? /E = 1.61 500 E = 805 (this is textbook currency) C$/ = .92 77 C = 71$ – why is it switched all the sudden? I can’t figure it out unless it was /CD = .92, then the answer would be 71, and I would not be so confused. Does it have something to do with parent / subsidiary currency? Does it have something to do with special US currency formulas? Kind Regards To All Those Who Can Help
It doesn’t work in the second because the EUR, and the British pound, are the only 2 exceptions to the quotes, always quoted in terms of price of 1 EUR or 1 BP expressed in foreign currency, which are indirect quotes for an American (I’m referencing European and American terms). As far as I remember, the Australian $ used to be quoted the same, but the convention changed for the AUD. The above convention is considered to be some sort of reminiscence of the old British empire.
Map1 can you give me an example?
The quoting convention is for any currency quoted against the US$ is in direct terms: how much of the foreign currency is needed to buy 1US$, say in Japan: how much JPY is needed to buy 1USD. This will be a JPN/USD quote, or, remember the new convention used in the books, USD:JPY. Or in Canada, how much C$ buys 1US$, which will be quoted C$/USD or the new convention for quoting, USD : C$. There are 2 exception to this convention, the quotation for EUR and the quotation for the GBP. Quotes for EUR and GBP against the USD are always indirect, how much USD buys 1GBP or buys 1EUR. This will be a USD/EUR or USD/GBP quote, or, remember the new convention used in the books, EUR:USD, or GBP:USD. Just a convention.
To be honest CFA.Rhythm, you are absolutely correct. The quotation is 1 US dollar is 0.92 CDN dollar, or 1.09 US dollars to 1 CDN dollar. I think it’s a typo.
If it really is: "2007 Exchange Rate: Canadian / U.S. (this is exactly as it’s written on page 199) " As you say, then it it is a typo.
PLEASE NOTE THAT THIS IS A CFAI ERRATUM ITEM… WAS DISCUSSED ON ANOTHER THREAD. It actually was Canadian /US = 0.92 which had to be provided in the question.
Thanks CP 