Weird - Direct vs Indirect FX

CFA Level II
#1

Hello everyone,

I think I have a full grasp of the difference between direct & indirect fx quotes, however…

I’m confused by the fact that equity section is using indirect quotes for all the parity relations whereas the rest of the curriculum uses direct quotes.

How does everyone think we should approach the questions, just assume as it does in the book that all parity relations are DC:FC ??

#2

Direct quote tells us the per unit of foregn currency whereas Indirect quote tells us the per unit of domestic currency. Your quote is per unit of DC therefore it should be taken as an Indirect Quote.

However pl. tell me the page no of eqty section which used the Indirect quote.

Thanks in advance.

#3

Actually no, only section that uses indirect is equity parity relations, rest is direct. See page 639 of book 1

#4

On page 639 of Book 1, it is already given that Eurozone is the Domestic Currency and S = $1.25. Now if $1.25 per Euro is given and we know Euro is the domestic Currency then it is very much clear from my previous comment post that it is Indirect Quote. You have to be alert to check out whether the Quote is given per unit of foreign currency or per unit of domestic currency and then decide accordingly.

#5

I understand what you’re saying, but i’m not worried about interpreting the quote.

I’m trying to figure out which way to memorize the equations so that i don’t confuse myself given that all parity relations formulas are structured indirect vs ICAPM for example which are strructured as direct.

#6

Remember if the Spot quote is /Euro. since is in numerator multiply interest rate of $ with spot rate and then devide by Euro interst rate bcz Euro is in denominator. The way Spot quote is given, the same way the Interest rate of the respective currency is multiplied.

e.g DC:FC = Euro: = 1.25 this suggest that FC/DC = /Euro = 1.25/1 this is the spot rate,

Interest rate Euro = 5%, Interest rate $ = 3%, Forward Rate = (1.25* 1.03)/ 1.05.

Now note that was in numerator in the Spot rate so Interest of is multiplied in numerator, since Euro is in denominator so Euro is divided in denominator. This is applicable to Direct quate as well you have to check only which cuurency is in numerator and which currency is in denominator and put the Intrst rate in the numerator or denominator accordingly to get the forward rate.