Among the potential calculation questions that you might get on the CTP exam, there are those that could require you to make US Dollar/Foreign Currency conversions. If you haven’t had “hands on” experience in this area, then you need to study and learn the rules of how to make these conversions as outlined in the BOK. However I have found over the years of working with CTP candidates to prepare for the exam, for many of them remembering how to apply these rules to $/FX conversion questions has been a source of concern and frustration.
So, some years ago I introduced an alternative method for solving $/FX conversion questions that utilizes a little bit of “off-the-shelf” math that is based on the concept of “proportional relationships”. This alternative method works because:
1) $/FX quotations are ratios, whether they are expressed as “US$ Equivalent” or as “Units of FX per One US$”
2) Ratios can be set equal to each other which allows you to solve for the amount of the currency in question (i.e. $,s or FX)
The advantage of this method is that you don’t have to remember if you should multiply or divide by a given FX quote to solve for the amount of US$ or foreign currency.
There are three steps in this method:
1) Set up your ratio equation.
2) Cross Multiply
3) If necessary, isolate the unknown currency by dividing each side of your equation by common terms.
Here’s a couple of examples taken from the Participants Guide (pg S6-8) of the AFP Learning System, Treasury 3rd Ed.
Slide 21
How many euros would $2,000,000 buy if the quoted rate for the USD equivalent is EUR 1.3383?
1) Set up your Ratios:
1 / $1.3383 = EUR ? / $2,000,000
2) Cross Multiply
$1.3383 X EUR ? = $2,000,000
3) Isolate the unknown currency
$1.3383 X EUR ? / $1.3383 = $2,000,000 / $1.3383
4) Solve
EUR ? = 1,494,433
Slide 22
How many Yen would $2,000,000 buy if the quoted rate for the Yen is USD / JPY 92.56?
1) Set up the Ratios
1 / 92.56 = $ 2,000,000/Yen?
2) Cross Multiply
Yen ? = 92.56 X $ 2,000,000
3) Solve
Yen ? = 185,120,000
This alternative method for solving FX conversion questions, if properly applied, will always give you the correct answer without the need to memorize and apply the FX conversion rule.
-George Schilling, CTP
|