Level 1 CFA Economics: Currency Exchange Rates-Lecture 1

This is Reading 18 for the 2021 exam.
This CFA exam prep video lecture covers:
The foreign exchange market
Nominal and real exchange rates
Examples
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[@IFT-CFA]

How much practice do I need to do? The Magic Number of questions to do to Pass Level I exam is…...read on here: ift.world/the-magic-number/

[@timetostudy6443]

For someone who doesn’t understand the conversion at 3.35. USD/EUR=1.3 to 1.4 =>1 EUR = 1.4000 USD so if you have 2 EUR in the case USD/EUR = 1.3000 you can only purchase 2.600 USD, while USD/ EUR =1.4000 you can purchase 2.8000 USD, and so on. Hence, Currency appreciation of EURO which is the base currency in this scenario.

[@abbasrizvi60]

great example to explain.THANK YOU.

[@IFT-CFA]

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[@kanchansingh7302]

The first question of exhibit is not clear, since it says the base currency is getting strong then how the AUD investment become more valuable?

[@IFT-CFA]

Because appreciation of base currency will result in the increase in the nominal value of the base currency- denominated investments when measured in AUD terms IFT support team

[@ishitashah8485]

@@IFT-CFA You are trying to say that the foreign investment is in HKD and it will be converted to AUD on maturity??? But it's mentioned that it is AUD denominated.please clarify?

[@maazrushnaiwala1438]

Same question Sir. If you can elaborate please? If Hong Kong dollar appreciates, wont the value in of bond in AUD decrease? I cant wrap my head around this. Please help?

[@shivaniadavade2011]

I had the same question. It's still not clear.

[@thaonguyenphuong2154]

2:08 if 1 EUR =1.3 USD then USD/EUR =1/1.3 ?

[@IFT-CFA]

1 EUR = 1.3 USD implies USD / EUR = 1.3. IFT Support Team

[@muskaanarora6868]

8:27 - if AUD/HKD increase, how does AUD denominated expenses increase? isn't HKD appreciating and AUD depreciating? Please explain.

[@KaranGoda-qp1nm]

Is this convention specific to the CFA material? Had the same question

[@samiman.8287]

Apparently forgotten to mention the last tricky question considering the pice currency (not base currency) view, which will result to the result of -8% as a correct answer. Please comment if I am wrong.

[@IFT-CFA]

Dear Samiman, Yes, If the base currency increases by 5% and 5% and the price currency increases by 2%, then you can say that the result is -8%, i.e. through linear approximation. IFT Support Team

[@sammedbhandari2179]

If inflation is there in Base currency, prices in that currency will increase hence the currency must weaken but by real exchange rate formula, it is actually getting strengthen as real exchange rate is increasing with increasing prices in base currency. Please explain.

[@IFT-CFA]

Real exchange rate price currency/base currency = nominal exchange rate price currency/base currency x (Base currency CPI / Price currency CPI). Here, base currency is foreign currency and price currency is domestic currency. If real exchange rate increases, it means that it now costs more, in real terms, to buy foreign goods. IFT support team

[@sammedbhandari2179]

Thanks IFT, I think now I got it right now. Just to clarify the concept more, if 2 currencies are trading at a price which is neither undervalued, nor overvalued then real exchange rate should be 1, right?

[@TheYaniTV]

In Question 4. Isn't the income we receive from the investment in HK in Hong Kong dollars? And if the AUD appreciates and the HKD decrease the AUD denominated value of the income we receive (which is in HKD) fall?

[@TheYaniTV]

Because in Question 1 you said that when the HKD increase, the australian denominated value of our investment in Hong Kong increases?

[@gonzalosalvado435]

Great material! However I have a doubt. In the example of minute 3:45, if the base currency (EUR) rise its value (or appreciate), the exchange rate USD/EUR wouln´t be lower? Thank you so much!

[@IFT-CFA]

Dear Gonzalo, The convention used is USD/EUR, so if Euro appreciates then it means that fewer Euros are required to purchase Dollars or in other words the same amount of Euros can buy more Dollars. Hence, either the the denominator(EUR) will decrease or the numerator(USD) will increase. That's what the examples in the video also shows, the USD/EUR goes from 1.3 to 1.4 when Euro appreciates (1.3/1=1.3 to 1.4/1=1.4). IFT Support Team

[@ethintom2925]

Hello i still cant understand at 3:50 instructor said if base currency strengthening than exchange rate will increase. How is it possible? Is it some sort of error. However the curriculum also suppprts the instructors view. Here is what it says please help. In this case, the euro is the base currency and the US dollar is the price currency. A decrease in this exchange rate would mean that the euro costs less or that fewer US dollars are needed to buy one euro. In other words, a decline in this exchange rate indicates that the USD is appreciating against the EUR or, equivalently, the EUR is depreciating against the USD. I will be really thankful for ur act of kindness

[@ethintom2925]

@@IFT-CFA please reply

[@raquelalarcon660]

I have the same question, if the exchange rate increases I would think the price currency appreciates or that the base currency depreciates... Please help

[@nicatalishov1419]

​@@ethintom2925 The main thing here is the quotation. I am trading at FX and what I have seen so far is that Base currency is written first such as EUR / USD = 1.10 If 1.10 becomes 1.15 it means Base currency has appreciated against Price currency. However, curriculum use the other approach. It says that your Base currency is the one in the denominator and therefore any increase in nominal exchange rate means base currency has appreciated. Curriculum has a footnote about it explaining why they use this approach. It is basically due to the fact that when we write A / B it means A per B and therefore it is more logical to write Base currency in the denominator. However, it also indicates that there are other ways to quote such as B / A or B:A . It has the same result and the only difference is the quotation they use.

[@tusharkurhade590]

Thankyou

[@PankajKumar-ux7je]

Hello sir, I need Currency exchange related Notes ...can you please provide....??

[@IFT-CFA]

Dear Pankaj, Please visit this link for the notes and Q-bank package: ift.world/product/notes-q-bank-lev1-dec/ IFT Support Team

[@someonespeci1697]

#cfasuicide is real

[@dorcasnjoroge8912]

please add english subtitles to this video, asking on behalf of hearing impaired people here. Thanks

[@IFT-CFA]

Thank you for your suggestion. It has been noted. By the way, KZbin does have the option to see the subtitles from the menu. IFT support team

[@dorcasnjoroge8912]

But in this video the caption feature is not there

[@saranshgupta8449]

Video not loading.

[@IFT-CFA]

Dear Saransh, We have checked and the video plays. Maybe the loading issue at your end has to do with the internet connection or firewall etc. IFT Support Team

[@TheSaransh1995]

yes, seems to be working fine.