# Foreign Exchange Risk Management (part a)

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1. says

Dear sir,
i am soo lost i need a GPS!!!! initilally i was flowing and understanding but i got stuck when you had to multiply the exchange rate instead of dividing .As for the concept of which exchange rate to use is clear .kindly help please.
thank you.

• says

If, for example, there is a \$/GBP exchange rate of 1.50, then it means that 1 GBP is equal to \$1.50.
So if you are converting GBP to \$ then you need to multiply by 1.50.
(1 GBP = \$1.50; so 2 GBP must equal \$3; 3 GBP must equal \$4.50, and so on).

However, if you are converting from \$ to GBP then you need to divide by 1.50.
(\$1.50 = 1 GBP; so \$3 must equal 2 GBP; \$4.50 must equal 3 GBP and so on)

• says

thank you sir,may God bless you.appreicate t

• says

Thank you soo much sir,i really appreciate the quick response..

Bonne weekend!

2. says

hello can you say this when we receive from foreighn country we used high interst rate but when we paid then use low rate

• says

Yes, but only because if you are receiving you will need to borrow, and when you borrow then you pay the higher interest rate.

3. says

sir when do we have to divide and when do we have to multiply.. i am gettng confused about that

4. says

Hi Sir John Moffat,

I have listened to the lectures a few times for the foreign exchange aspect of the syllabus. However, i still never get the correct rates. Please how can you assist. I really need the advice because if the rate chosen is incorrect the entire question is incorrect.

Regards
Shamela John

• says

I cannot really give any other rules than the ones that I give in the lecture (I assume that you have the Course Notes in front of you while watching the lecture?).
Just remember that it is always the rate that is worst for us – i.e. if we are receiving money then the rate that gives the lowest receipt, and if we are paying money then the rate that gives the greatest payment.

• says

Yes i have the notes last night i went through the lecture like 3 times again and I’m slowly grasping it. Thanks for your quick response.

5. says

Hello sir, I’m having one confusion. If I look at example 1. Two exchange rates are given
\$/£ 1.6250-1.6310
In your lecture you are telling us that if the company is buying the first currency then it’s the first rate and vice versa.
What I just can’t comprehend is that if the company is buying at a lower rate from bank which is 1.6250 then the company can make it a business by selling it at 1.6310. Over and over again. I’m sure I misunderstood something.
I would be grateful to you if you can help me on this

• says

If you then sell the \$162.50 you will receive £ 162.50/1.6310 = £99.63.

You will have lost money! (It is the bank who makes the profit!!)

6. says

To Moffat and Hamzaharoon, thank you guys so much for explaining this. I think I totally understand it now. I was looking at it from the bank’s point, but was still getting confused, now I think I have gotten it.

7. says

Hello

Please can you help me I don’t know which exchange rate to use i’m confused and getting totally stressed out because of it…

Charlotte

• says

It is hard for me to say any different then I say in the lecture.

I assume that you realise that the reason that there are always two rates given is because the banks want to make a profit! Because of that we always use whichever of the two rates is worse for us – if we are paying money then it is whichever rates mean we pay most, if we are receiving money than it is whichever rate means we receive less.

What I suggest you do is try one or two of the examples in the Course Notes. Try using both rates and decide which of the two rates must the correct one (whichever ends up being the worst for us).

Once you have convinced yourself, then you need a rule for it (because in the exam you don’t want to waste time trying both rates). I explain in the lecture the rule that I use. However, it doesn’t matter what rule you use – whatever is easiest for you to remember. But if you convince yourself with a few examples which rate is the most sensible, then you should find it easier to either remember my rule, or to create a different rule that is suitable for you.

• says

I think I have figured it out… I just need to look at it from the banks point of view. I have also done an acrostic to remember when to times and when to divide. I will do some more practice questions which I haven’t come across before and make sure I definitely have got the hang of it. Fingers crossed. Thank you John your a star! ????

• says

@charlottecallaghanclarke A Trick for you:

The exchange rate spread ( \$ to Pound)
1.6250 – 1.6310
Paying – Receiving

As you can see, when you are RECEIVING money from a customer in foreign currency, you will need to SELL the foreign money you have received to the Bank, in order to get your home currency, Pounds. (Why? Because this is the currency you use in your home F/S.) But what rate will you use when SELLING? As a rule, you will only use the rate which is profitable to the Bank, i.e. the Higher rate, as shown above.

Similarly, if you are PAYING money to a foreign supplier in the supplier’s currency, you will need to BUY the supplier’s currency from the Bank. What rate are you going to use when buying? You will use the rate which is profitable to the Bank. i.e. the LOWER rate.

Imagine you are BUYING a cellphone quoted at \$ 500 – 600 from a Supplier, and I told you that the ‘rule’ is that you will PAY the price that is profitable to the Supplier. Then you will obviously PAY \$ 600. i.e. profitable to the supplier, not you.

So in short, for easy recall, just remember,
Lowest rate – Highest rate
1.6250 – 1.6310
B – S
P – R

BS and PR… or for easy memory, Balance Sheet and Public Relations.