currency appreciation vs depreciation

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greku2008

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Hi,
although I read the currency stuff several times now, I am still confused with the effects of curreny appreciation and depreciation. I just can`t remind when I loose money.
If currency rates are quoted, I can calculate the effects. However, in some exams questions appeared where my home or the foreign currency depreciated or appreciated and I have problems to remind the effect on my domestic currency reurn (gain or loss).
Is there any good rule of thumb, where I can remind me this stuff for tomorrow?
Thank you very much in advance
Greg
 
You have an exchange rate quoted as X/Y…
All you need to do is look at what’s at the bottom, in this case Y.
If X/Y goes up then Y appreciated..
If X/Y goes down then Y depreciated..
 
Isn’t it the opposite?
If it costs $1.50 to buy 1 GBP, therefore $1.50/1GBP, and then the exchange rate changes such that now it costs $1.00 to buy 1GBP or $1.00/1GBP (or alternatively, $1.50 / 1.50GBP), effectively the “Y” has gone up, but “Y” has depreciated because it’s cheaper to buy now.
Or did I misunderstand your explanation?
 
In your example, the $ has appreciated and hence the GBP has depreciated.
The exchange rate went from a high to a low number which means that whatever was in the denominator has depreciated. i.e. GBP.
Which ties up to my illustration…
 
I always look at it this way:
Think of 1.33Euro/$ as 1.33 Euro to 1 Dollar.
If the spot rate goes to 1.35/$ than it takes more Euro to buy one dollar hence the Euro has depreciated against the dollar.
If the spot rate goes to 1.3/$ than it now takes less Euro to buy one dollar hence the Euro has appreciated versus the dollar.
 
The “price” of a currency (numerator) tells you if you’re gaining or losing on the trade.
  • If your price has gone up, you’re losing if you “bought” (rebuying domestic to close your position is more expensive, more local to buy fixed unit of domestic))
  • If your price has gone down, you’re gaining if you “sold” (rebuying domestic is more cheaper, less local to buy fixed unit of domestic)
——————————————————————————–
Example:
Buy USD/CHK 1.07
Buy 1 CHK
Sell 1.07 USD
USD/CHK moves to 1.09 -> close position
Sell USD/CHK 1.09
Sell 1 CHK
Buy 1.09 USD
——————————————–
Profit/(loss)
1.07/1.09 - 1 = -1.8%
I hope that’s right!
 
Think of currencies as commodities. (They are.)
If a currency appreciates, its price goes up; if it depreciates, its price goes down.
Suppose that GBP appreciates vis-à-vis EUR. Then it takes more EUR to buy one GBP: EUR/GBP increases; GBP/EUR decreases. EUR has depreciated vis-à-vis GBP.
 
What I still sometimes find confusing is, say a quote of GBP/USD is 1.5, which in currency terms means # of USD/ 1 GBP; however algebraically the quote of GBP/USD ACTUALLY means: # of GBP/ 1 USD.
The rule though is: Currency Quotes - the 1st currency in the base currency & in algebra the base is the denominator.
Direct Quote= Foreign Currency is the Base Currency (eg EUR/USD for a US investor)
Indirect Quote = Home Currency is the Base Currency (eg GBP/USD for a UK investor)
 
S2000magician wrote:
CFA Institute’s convention is USD/GBP 1.5253 means $1.5253 = £1.0.
Click to expand...
Well this add to my confusion as i have seen questions in L1 and L2 quoting GBP/USD - 1.5 meaning the other way round.
 
patso wrote:
S2000magician wrote:CFA Institute’s convention is USD/GBP 1.5253 means $1.5253 = £1.0.
Click to expand...
Well this add to my confusion as i have seen questions in L1 and L2 quoting GBP/USD - 1.5 meaning the other way round.
Click to expand...
This has been CFA Institute’s convention for quite a while now.
 
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