IRP: f/s = (1+d)/(1+f) PPP: f/s = (1+f) / (1+d) Are these formulas right? I am REALLY CONFUSED WITH THE currency.
if rates are in DC/FC , put DC or interest rate of domestic country in numerator
DC/FC is what? FC per unit of DC ughhhh, someone kill me.
tell us where to come!!! (all of us are in the same boat)…
Ok. just got this in my head now. SCHWESER – i hate you. the bottomline for this is: forward/spot = (1+d)/(1+f) and no matter what happens, always convert the exchange rate to keep in this format: think how much it cost to take a vacation abroad. home country for me is USD, so how much USD i give. for instance they say london is really expensive, so i know its something like 1.5 etc. japan is like 99 something, euro is like 1.1 etc.
in econ they always use foreign over domestic but everywhere else (PM, derivatives) they use domestic over foreign. Really confusing
Yes it is, but the thing as long as you keep domestic in numerator on both sides of the equation or if you keep foreign as numerator on both sides of equation, you’ll fine. The key here is consistency WITH relation to how the quotation is given. if the quotation is in direct quotes then domestic on top, if quotation is in indirect ways, then foreign on top. THE ABOVE TWO LINES PRETTY MUCH seals THE DEAL for the currency thingy. I AM GOING TO STICK TO IT NOW AND NOT GOING BACK TO REREAD TO GET MORE CONFUSED. Also it helps to remember direct quotes is how you’d like to take vacations abroad.
pepp Wrote: ------------------------------------------------------- > Yes it is, but the thing as long as you keep > domestic in numerator on both sides of the > equation or if you keep foreign as numerator on > both sides of equation, you’ll fine. > > The key here is consistency WITH relation to how > the quotation is given. if the quotation is in > direct quotes then domestic on top, if quotation > is in indirect ways, then foreign on top. > > > THE ABOVE TWO LINES PRETTY MUCH seals THE DEAL for > the currency thingy. I AM GOING TO STICK TO IT NOW > AND NOT GOING BACK TO REREAD TO GET MORE CONFUSED. > Also it helps to remember direct quotes is how > you’d like to take vacations abroad. You hit the nail on the head, just keep it consistent.
So just to beat this to death. If it’s in direct quote format, then Spot rate * (1+ DC / 1+ FC) = price of forward contract?
Direct Quote would be if you were the US investor pricing a forward contact. spot rate is 100$/Euro
Yes. Direct quote means VACATION to me, it helps me to think like that. I live in US. so direct quote if i want to go to mexico i’d budget 500USD, that’ll give me lots of pesos to blow. So from my perspective i want to know what’s lots and how much?? if the quote was .4, then i know its indirect cuz for 1 usd i can’t be getting only .4 pesos. if the quote was like 2.5 then i know i am good. cuz for 1 usd you should be getting more than atleast 1 peso. this much we all know.
another way to think of it is, DIRECT = MULTIPLICATION INDIRECT = DIVISION i will not go to sleep until i hammer this into myself.
gotcha. yea that helps me also, just knowing which one is the strongest currency. Great that bit of info just helped me out a ton. Thanks pepp