Currency Exchange Rates: Define direct and indirect methods of foreign exchange quotations, and conv

Discussion in 'Company Articles' started by Huskins, Apr 3, 2012.

1. Huskins Former Special Consultant to the FPA

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Currency Exchange Rates: CFA Level 2 Reading 17; LOS a
This article is in response to a lot of CFA candidates seeking my help to understand and get an easy framework so that they can answer questions related to the chapter on Currency Exchange Rates in the CFA level 2 curriculum.

It is very important to understand currency quotations; Most people have trouble understanding how a Currency is quoted and algebraically what it means; this is because they are just the opposite. So if a Currency is quoted as Eur/USD = 1.33406; it meens the 1st currency in the Quote is the Base (Think of it as the asset being traded) and the 2nd currency is the counter currency, i.e. what the asset (base) is being traded with, however
Algebraically the quote of Eur/USD actually means : # of USD/ 1 Euro.
So In our example EUR/USD at 1.33406 actually means 1.33406 USD / 1 Euro; remember the 1st currency in the quote is the base currency and in algebra the base is the denominator.
If you understand how a currency is quoted and what it actually means; all other concepts would be pretty easy to grasp.

Currency Exchange Rates: Define direct and indirect methods of foreign exchange quotations, and convert direct (indirect) foreign exchange quotations into indirect (direct) foreign exchange quotations | Professional Forex News Trading Services

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