CFA Level I · CFA Level I Exam · Exchange Rate Calculations
An analyst observes the following spot quotes: USD/EUR = 1.0800 and GBP/USD = 1.2500 (both quoted as price currency/base currency, so USD/EUR is the number of USD per 1 EUR and GBP/USD is the number of GBP per 1 USD). The implied cross rate GBP/EUR (GBP per 1 EUR) is closest to:
The implied GBP/EUR cross rate is 1.3500. Because USD is the price currency in the first quote and the base currency in the second, the two rates are multiplied: 1.2500 × 1.0800 equals 1.3500 GBP per euro. Dividing would give the wrong result.
- A0.8640
- B1.1574
- C1.3500Correct
Explanation
GBP/EUR = GBP/USD × USD/EUR = 1.2500 × 1.0800 = 1.3500. The 0.8640 figure comes from dividing 1.08 by 1.25 instead of multiplying, and 1.1574 comes from 1.25 divided by 1.08. Both invert one quote wrongly.
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