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.

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!

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.

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?