I am not one that tries determing domestic of foreign currency whenver looking at FX rates, I simply think of it as price/base and that tends to work most of the time. However, I’m wondering when dealing with intercorporate investments, how can I tell if the foreign currency is depreciating or appreciating?
Lets say I have US Co. and Brit Co. which is a subsidiary of US Co. Brit Co. reports in Pounds and US Co. in dollars. To me, this means I’ll use the Current Rate method.
Let’s also assume I’m giving the followings FX rates: Current: 1.5/1 GBP Average: 1.2/1 GBP. To me, this means that the GBP is appreciating.
If I have net asset position under the current rate method I would report a positive CTA if I deem the GBP as ‘foreign’, but if I’m deeming the USD as foregin, I’d assume the GBP to be depreciationg and have a negative CTA, etc…
In the problem will they always give us the exchange rate as of the foreign currency (base currency)? Or is there a trick I’m missing. Is the foreign currency from the prospective of the company translating? or the parent company?
Sorry for all that but I can’t seem to find anything online…
So then is it safe to say that within Intercorporate Investments the parent currency will alaways be the domestic currency?
Additionally, if in my above example, instead of GBP being the base currency, had they given me USD as the base, and my USD FX rates were: Current 1.2/1 USD and Average: 1.5/1 USD, can I still take this to mean that the GBP (my foregin currency) was appreciating?
Will it be the case that currency is determine based on perspective - if the statements I hold is denominated in GBP and I need to translate them to USD denominated, my foreign currency is the USD.
If, however the statement I hold is denominated in USD and I need to translate them to GBP denominated, my foreign currency is GBP.
It is the other way around, if the statements are in GBP and you want to convert it to USD, then GBP is the foreign currency. The perspective is from the end result. Your aim is to convert it to your currency(domestic), so whatever it originally is would be foreign.
The “domestic currency” is the reporting currency used by the parent company which is consolidating it’s foreign subsiduaries’ accounts into it’s own accounts.
So in this instance if the parent company reports in USD and the foreign subsidiary uses GBP, then USD if the domestic currency and GBP is the foreign currency.
