I was studying the impact of changing exchange rate on different exposures through schweser and had a hard time understanding it. So, I turn upto CFAI and find that it contradicts what Schweser says.
Schweser says that under the current rate method when there is net assets exposure, appreciation (depriciation) of local currency leads to gain (loss). They have drawn a figure (Fig 2, Pg 68) explaining this.
In the CFAI text, just above 3.2.2 (Pg 136), it says: Under a net asset exposure, if foreign currrency weakens (i.e. local currency appreciates), the current rate method results in lower CTA.
I thought CFAI curriculum calls foreign currency the currency of the subsidiary i.e. foreign currency = local currency vs parent’s currency = presentation currency.
So if local (foreign) currency weakens (depreciates) it results in a lower CTA.
But I can’t find this sentence you are referring to (I have the online version of the book only).
Are you sure that CFAI calls subsidiary’s currency as the foreign currency?
Here’s the exact text just above 3.2.2:
When the foreign currency increases in value (i.e., strengthens), application of the current rate method results in an increase in the positive cumulative translation adjustment (or a decrease in the negative cumulative translation adjustment) reflected in stockholders’ equity. When the foreign currency decreases in value (i.e., weakens), the current rate method results in a decrease in the positive cumulative translation adjustment (or an increase in the negative cumulative translation adjustment) in stockholders’ equity.
(Institute 137)
Institute, CFA. 2017 CFA Level II Volume 2 Financial Reporting and Analysis. CFA Institute, 07/2016. VitalBook file.
The citation provided is a guideline. Please check each citation for accuracy before use.