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Hi,
I’m confused with currency exange rates given in the exam papers:Pilot paper Q2: ‘The current Euro/sterling exchange rate is EUR 0.6900 to the pound’. Is it a direct quote (i.e. I have to pay 69 pence for one euro)? The answer implies that, it is a direct quote. Should I consider having a direct quote, when I see expression like ‘current x-rate is USD 30 to the ruble’ (i.e. 1 USD = 30 rubles)?
For example June 2009 exam paper Q3: ‘Euro 0.8333 to the dollar’?
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this question is quite confusing i agree. first of all, rather than getting confused on whether it is a direct quote or an indirect one. u shud see how u wud be attempting the question. The question supplies us with interest rates for all the countries, this suggests that we will have to use IRPT to forecast future spot rate.
IRPT cannot be calculated using direct quote, it is always used wid direct quote. Furthermore, the quote given is actually from Europe’s perspective which mean that u’ll only 0.69 pounds to get 1 Euro. I know the question is not clear about that but on the overall it seems like that.
Another common sense u can use is tht until recently pound was the stronger currency than euro, so if the company is UK based and u see a quote of Euro 0.69 to 1 pound…theres something fishy over here. I hope this answers your question- Topics: 0
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IRPT is always used wid indirect quote, sorry for the mistake
What you gonna do when you given exchange rate intergalactic monetary unit 0.69 to pound? 🙂 Is it direct or indirect?
Some info i got from the internet.
FOREX are quoted in this way, e.g. GBP/EU
The left side is called the base currency, while the right side is called the counter currency.
If the home currency is on the left, i.e. the base, and the foreign currency on the right, i.e. counter currency, then it is a direct quote. e.g. GBP/EU = 1.5 means that 1GBP = 1.5EUIndirect quote is the opposite, where the foreign currency is on the left, i.e. the base, and the home currency is on the right, i.e. counter currency.
I’ve been cracking my head over this question and i think there’s a mistake to it.
“EUR 0.6900 to the pound” means 1GBP = 0.6900EU, according to the suggested answer. This sounds correct if you intepret it in language terms. “to the pound” means 1 pound. Hence 1GBP = 0.6900.
However, this is quite strange because Bob Ryan, the examiner, always uses real life scenarios. So implying that the EU is stronger than GBP is inaccurate.
Second error in the question is the calculation of the forward rate using IRP formula. The formula is
Spot rate(indirect) X (1+ic)/(1+ib)
where
ic= interest rate in counter current country, i.e in this case should be UK’s interest rate as this is indirect quote. But the suggested answer puts ic as the EU interest rate.
ib= hence should be EU’s interest rate, but the suggested answer puts it as UK’s.Can anyone please confirm the above error?
Thanks.
There is no doubt that in pilot paper Q2 “The current Euro/sterling exchange rate is EUR 0.6900 to the pound” is indirect quotation because home currency is pound and foreign currency is Euro..basic rule says that Direct quotation is where the cost of one unit of foreign currency is given in units of local currency, whereas indirect quotation is where the cost of one unit of local currency is given in units of foreign currency…and in this question EUR 0.69 to the pound means:
1 pound(local currency)=0.69 Euro(foreign currency)
but when looking at answer it has been used as direct rate i.e 1 Euro = 0.69 pound….either quotation given in question is mistake or answer is wrong in interpreting the quotation…this is my opinion based on my internet surfing…“Direct quotation is where the cost of one unit of foreign currency is given in units of local currency, whereas indirect quotation is where the cost of one unit of local currency is given in units of foreign currency”
I think you got it inverse.
Direct is how much of foreign currency can 1 units of local currency buy.
Indirect is how much does 1 foreign currency cost in local currency.Check this: https://www.investopedia.com/university/forexmarket/forex2.asp
Home I’m right!
ha ha i m laughing at investopedia…the link you referred really says what u say..but again from the same source (investopedia) i got inverse of what u say..
check this: https://www.investopedia.com/terms/d/directquote.aspi don’t know which one to follow…its cracking my head help me clearing this confusion dude…
check this: https://www.forexrealm.com/forex-articles/quotations-and-spread.html
what do you about pilot paper Q2..quotation …is it direct or indirect quotation?It’s consoling to know that someone else in the world is having a cracked head over this haha.
Anyways, here are some updated findings:
1. I’ve checked with BPP study text, and it seems that your original statement is right.
i.e. Say the local currency is GBP and foreign currency is Euro,
Euro/GBP=0.6900 means 1 GBP = 0.6900Euro, an indirect quote. vice versa for direct quote.2. Bob Ryan’s book “Corporate Finance and Valuation” and Kaplan’s study text seem to support this too.
3. I remember my lecturer mentioned in passing, saying that there are two conventions/ways to quote forex rate (i may be mistaken on this, so pardon the inaccuracies).
One is as above, where Euro/GBP=0.6900 means 1GBP=0.6900Euro
The other is where Euro/GBP=0.6900 means 1Euro=0.6900GBP (this is per investopedia).So perhaps ACCA adopts the first approach.
4. Seeing that Investopedia and a few other sites are the only inconsistencies, I think I’ll stick with what you’ve mentioned earlier. But the best way is probably to know the real forex rate in life. e.g. GBP is bigger than USD and Euro, that way we can double check.
So in Pilot Q2, the correct rate is probably 1Euro = 0.6900GBP, a direct quote.
if i had assumed pilot Q2 quotation being indirect as per basic rule …and solve accordingly..
will i get full marks for it or not?
based on real life exchange rate knowledge and basic rule..this is obviously conflicting..
under this circumstances do we have choice of considering it as any (direct or indirect)?I think even if you’re wrong, probably will lose about 2 or 3 marks max. Carry forward mistakes will not be penalized. So, better to move on to other things. Just pray that the paper is not ambiguous.
Losing 2 or 3 marks might make the difference between pass and fail, you cannot afford it 🙂 I passed P1 with 51 marks this winter, I could have afforded only 1 mark to lose 🙂
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