In the CFA exam, foreign exchange is pretty confusing because one has to be familiar with the conventions. Here, I would like to give you some suggestions when dealing with problems about the foreign exchange.

1. Imagine you are a local dealer.
2. Foreign currency (FC) is just a kind of “good” and you are trading the good (FC) using domestic currency (DC).
3. To trade the “good” (i.e. FC), you post a bid-ask spread. Example, you buy an apple for US$2 (bid) and you sell apple for US$2.5 (ask). And similarly, you buy British Pound (just like apple) for US$1.8 and you sell British Pound for US$1.801.
4. Bid always comes before Ask and can be represented in the following forms (which means bid = 1.8000 and ask = 1.8010):
1. $/pound =1.8000 – 10
2. $/pound = 1.8000 / 10
5. The above is a direct quote which means it is quoted as DC per FC. I remember in this way: “direct quote” starts with “D” so, it is DC/FC.
6. It can also be an indirect quote, which is just the reciprocal of the direct quote and it is FC per DC (i.e. FC/DC)
7. For example, for an US dealer, the direct quote for pound is US$1.8/pound (DC/FC) and indirectly quote is 0.556pound / $ (FC/DC)
8. In direct quote, bid is always smaller than ask!