P/B Convention- currency management
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KeepOnTruckin
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- May 14, 2014
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if USD/GBP does down it represents a DEpreciation of GBP (vs USD). If GBP/USD (likely not quoted like this, but just to illustrate) increased, it represents an APpreciation of the USD. These two moves would be the same, actually.
Bottom line is that a rise or fall in the quoted P/B convention means an appreciation or depreciation in the base currency vs the price curency. And if you’re buying USD/GBP (futures, forwards, options, whatever), your’re long the base, short the price. This is important on those currency hedging questions.
Bottom line is that a rise or fall in the quoted P/B convention means an appreciation or depreciation in the base currency vs the price curency. And if you’re buying USD/GBP (futures, forwards, options, whatever), your’re long the base, short the price. This is important on those currency hedging questions.
S2000magician
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- Mar 17, 2013
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Base currency and price currency are independent of foreign currency and domestic currency (which is one reason this junk can be so confusing). If you have a currency exchange rate quote of, say, USD/EUR 1.3709 (i.e., USD1.3709 = EUR1.0), then USD is the price currency (whether you live in Germany or Kentucky), and EUR is the base currency (whether you live in Arizona or Greece).
S2000magician
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This is easy to remember if you think of currencies as commodities (which, for all intents and purposes, they are). Suppose that you have a quote for oil at, say, USD102.23/bbl. If the price changes to USD101.15/bbl, you’d say that oil has depreciated (with respect to USD): it’s now cheaper. If the price changes to USD104.83, you’d say that oil has appreciated (with respect to USD): it’s now dearer.
The same happens with currencies. If you have a quote of USD/GBP 1.6767 (i.e., USD1.6767 = GBP1.0), then if the quote appreciates (increases) to USD/GBP 1.6206, the GBP has depreciated (with respect to the USD), and if it depreciates (decreases) to USD/GBP 1.7163, the GBP has appreciated (with respect to the USD).
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KeepOnTruckin: Thanks mate. That was clear.
S2000magician- “If you have a quote of USD/GBP 1.6767 (i.e., USD1.6767 = GBP1.0), then if the quote appreciates (increases) to USD/GBP 1.6206, the GBP has depreciated (with respect to the USD)”
If the quote goes from 1.6767 to 1.6206, does it mean the quote has depreciated (decreases)? I now understand why this quote change results in depreciation of GBP but I don’t understand why did you say the ‘the quote appreciates’ when the value has clearly decreased.
Apologize in advance if i’m missing something really silly. Would be immensely helpful if i get this thing right.
Thanks again.
S2000magician- “If you have a quote of USD/GBP 1.6767 (i.e., USD1.6767 = GBP1.0), then if the quote appreciates (increases) to USD/GBP 1.6206, the GBP has depreciated (with respect to the USD)”
If the quote goes from 1.6767 to 1.6206, does it mean the quote has depreciated (decreases)? I now understand why this quote change results in depreciation of GBP but I don’t understand why did you say the ‘the quote appreciates’ when the value has clearly decreased.
Apologize in advance if i’m missing something really silly. Would be immensely helpful if i get this thing right.
Thanks again.
KeepOnTruckin
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- May 14, 2014
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Sure thing, homeslice. Glad I can help…and reciting and explaining is good reinforcement for me too…so everybody wins lol
S2000magician
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- Mar 17, 2013
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But it’s the base currency to which we’re referring.kobi wrote:
Yeah, I’d say it’s the other way round. If the quote goes up, the base currency appreciates and price currency depreciates. (it costs more of price currency to buy one unit of base currency)
If the price of a barrel of oil in USD goes up, we don’t say that the USD has depreciated vis-à-vis oil; we say that oil has appreciated vis-à-vis the USD. So it is with currencies.
S2000magician
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- Mar 17, 2013
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Frankly, I’ve never heard anyone refer to the quote per se as appreciating or depreciating. However, if the quote (as written) gets bigger, saying that it appreciates is somewhat natural; similarly saying that it depreciates when it gets smaller.
Magician,
In the quote, there are two currencies. When we say one appreciates, we mean that the other one depreciates. Correct? For example, the quote is now 1.3709 USD/ Euro. It changes to 1.3609 USD/Euro. What does that mean? It means that USD aprreciated agianst Euro and at the same time it means that Euro depreciated against dollar.
Am I correct?
In the quote, there are two currencies. When we say one appreciates, we mean that the other one depreciates. Correct? For example, the quote is now 1.3709 USD/ Euro. It changes to 1.3609 USD/Euro. What does that mean? It means that USD aprreciated agianst Euro and at the same time it means that Euro depreciated against dollar.
Am I correct?
S2000magician
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- Mar 17, 2013
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What kobi said.
(Note that the appreciation and depreciation are relative to each other; appreciation and depreciation have to be relative to something.)