Really Easy Question investing, domestic, exchange, properly, foreign

DoubleDip

I have a lot of trouble with exchange rates and how to read them properly. Its silly I know, but its really confusing to me.

When you have a firm investing in Japan from the US and the exchange rate shows

100 Yen / $

Which here is shown as the domestic and which is shown as the foreign?


Thx guys.

Analti_Calte

The reason why I am asking is because it makes a difference in how you answer questions.

EOC Reading 40 Question #8, they ask you to calculate the IRP and its in the perspective of a US investing in Japan. So i assumed that the US rate was domestic and the JPN was foreign, however the spot rate was in the "direct quote" so they inverted the IRP formula (1+f)/(1+D)

Anyways, just a really tricky / easy mistake to make....

So to understand..... the first currency mentioned (JPN) is the domestic quote for a Japanese investor and the foreign quote for a US investor. Aka direct and indirect?

lcw77

Domestic is currency of investor, foreign is currency on where the investment is.

So US investor = dollar domestic, yen foreign
Japanese investor = yen domestic, dollar foreign

just write the quote (direct or indirect) down as a fraction and apply the rates that correspond.

(100yen/1 dollar) * (1+japanrate/1+dollar rate)



Edited 1 time(s). Last edit at Friday, May 20, 2011 at 03:57PM by june2009.

lcai

Thanks guys that helps a lot. I think I will be writing down that formula on my exam sheet so i don't forget. Basically the first currency sign is your domestic rate and should be on top.

Thx!