- CFA Exams
- 2021 CFA Level I Exam
- Study Session 5. Economics (2)
- Reading 18. Currency Exchange Rates
- Subject 3. Cross-Rate Calculations

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**CFA Practice Question**

If $:Currency 1 = 4.00 and $:Currency 2 = 3.50, then ______

B. Currency 2:Currency 1 = 1

C. Currency 2:Currency 1 = 0.875

A. Currency 2:Currency 1 = 1.14

B. Currency 2:Currency 1 = 1

C. Currency 2:Currency 1 = 0.875

Correct Answer: A

Currency 2:Currency 1 = (4.00) / (3.5) = 1.14

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**User Contributed Comments**
14

User |
Comment |
---|---|

safash |
explain the concept |

vatsal92 |
$/C1 divided by $/C2. Reversing, $/C1 x C2/S = 4 x 0.29 |

davcer |
safash, you need 4 units of currency 1 to get 1 usd, and only 3.5 units of currency 2 to get 1 usd, so you need more than one unit of currency 1 to get a unit of currency 2, in other words currency 1 is worth .25 usd while currency 2 is worth .286 usd |

leon121 |
or one way of looking at it is through ratios...then solve for the respective currencies........ |

ars2011 |
C1=0.250 USD (Taking Reciprocal) C2=0.285714 USD (Taking Reciprocal) So now a Quote C2:C1 ,1 C2 = "x" times c1 which is 1.14 |

nfressell2 |
Is this not the opposite of how they did it on the last question? A:B was A/B now 2:1 is 1/2? Can anyone explain |

degosan9 |
I did the same thing as your nfressel. If you read closer, first pair is ($:C1) and second is ($:C2) so its a cross rate not direct prices of C1 and C2 |

choas69 |
i got confused here abit but then i saw that Currency 2 is stronger and hence it will give more than 1 |

khalifa92 |
given that currency 1 is base |

mtsimone |
To keep it as simple as possible always try to put the algebra in a cancellable form for the currency you want to get rid of. In this case flipping the formula so the USD is in one numerator and USD is in the other denominator cancels the USDs. If I try to start thinking about division it gets confusing, so I just flip to a cancellable form. That said, I'm admittedly not the sharpest candidate. |

davidt876 |
mtsimone - that method is quick but it can get confusing for problems like question 8, where you have to know which of the bid/ask prices to pick in each pair and then invert and multiply |

b25331 |
problem: C1/USD=4 C2/USD=3.5 , so next; C1/USD USD/C2 * 1/X (reciprocal) then; USD can now be cancelled out (see mtsimone's explaination above) result: C1/C2 = 4/3,5 = 1.1429 |

Ewan2015 |
This makes no sense when applying the logic from Q1 in Q1 a:b=a/b in this one a:b=b/a |

ashish100 |
Read the damn notes instead of these wannabe geniuses. AN did a great job explaining this. |