FAR Foreign Currency Questions: Why Do I Always Pick the Opposite Answer?
Start with the economics, not the exchange-rate arrow. Then identify whether you have a foreign-currency receivable or payable.
Did the foreign currency strengthen or weaken?
If one dollar buys more foreign currency than before, the dollar strengthened and the foreign currency weakened. If one dollar buys fewer foreign units, the dollar weakened and the foreign currency strengthened.
Foreign-currency receivable
You will receive foreign currency. If that currency strengthens, each foreign unit converts into more dollars, creating a gain. If it weakens, the receivable loses dollar value.
Foreign-currency payable
You will pay foreign currency. If that currency strengthens, buying the amount owed costs more dollars, creating a loss. If it weakens, the obligation becomes cheaper in dollar terms, creating a gain.
Use the four-box rule
| Position | Foreign currency strengthens | Foreign currency weakens |
|---|---|---|
| Receivable | Gain | Loss |
| Payable | Loss | Gain |
Watch rate quotation direction
Dollars per foreign unit and foreign units per dollar move in opposite numerical directions. Translate the quote into purchasing power before deciding gain or loss.
The takeaway
Receivable: you want the foreign currency stronger. Payable: you want the foreign currency weaker.
Related Summit guides
FAQ
If the dollar strengthens, what happens to a foreign-currency payable?
The foreign currency generally becomes cheaper in dollars, creating a gain on the payable.
If the foreign currency strengthens and I have a receivable?
That generally creates a gain.
Why do conceptual questions feel harder than calculations?
Exchange-rate quotes can reverse the visual direction. Translate the quote into economics first.