Exhange rates quotation interpretation different, interpret, understood, one

LorrinCFA

solution to EOC problem 10 reading 36 book 4. how does one interpret exchange rate. the solution interprets he exchange rate in one way for dividends and another way for purchase and sale transactions even though the euro dollar exchange rate is quote in the same way.

what number do i use to convert one currency to another.in short how do i interpret exchange rate notation. CFAI errata mentions different notations but i have not understood what they are trying to say.

RepoToronto

i heard on exam they r always clear about this
So if they say $\=0.5 they will go on and say that they meen one $ =0.5 or however they ment the notation to be.

spreads

You have to keep in mind the perspective/nationality of the investor. In this case a U.S. investor has purchased securities denominated in euro. Exchange rate is quoted with foreign currency in the base, so in order to purchase we must first take USD and go into Euro at the ask (because this is the offer rate to buy euros) for .9795 per dollar, and this transaction took place at time zero.
At time 3/12 the investor recieved the dividends (dividends must have been paid in euros, as this is a euro denominated stock so those euro denominated dividends must be repatriated into USD) and also sold the shares (again remember currently these are denominated in euros so this amount must be repatriated into USD). Note that we are also quoted a different exchange rate at this time. The bid rate at this time is .9810USD per euro, we use the bid now because this is the price the market maker will bid to us to buy euro in exchange for USD.
If you haven't already gone through the econ material, it may be to your benefit to stop and do so now. Economics gets incorporated into accounting with exchange rates, equity, derivatives, and portfolio management, and learning the material now will likely save alot of frustration in later readings.
Hope this helps,
Andrew