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Foreign Exchange Risk Management (part a)
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One thing that I use in order to get exchange rates right and might be helpful to some is this:
Step 1: First, understand in which currency your answer should be quoted in (i.e. that depends on which country your firm is based in, for example if your firm is based in Germany then the answer should be quoted in €).
Step 2: Write down the given exchange rate as a fraction (e.g. $ / €) clearly sorting out the numerator and the denominator. The fraction should be equal to the exchange rate. In effect, from Step 2 you are producing a form of equation.
Step 3: If your answer from Step 1 is the denominator (as in this example which the answer should be quoted in €) then you simply divide the given amount that needs to be translated to the exchange rate as if you were solving the formula for the denominator.
Step 4: Once you determine whether you need to multiply or divide, the choice of the left or right part of the spread becomes a no-brainer. You simply choose the part of the spread which is the worst for you! If you will receive money and from Step 3 you determine that you are going to divide then use the right (higher) part of the spread, which in effect will give you the lowest amount. Or alternatively, in the middle of the exam, calculate both outcomes (i.e. using the left and the right part of the spread) and pick the lowest amount. In contrast, if you are paying money and you are going to divide, use the left part (smaller number) because the result will be higher (worst scenario if you are paying).
when reciving money than we use buy rate and in next example when pay than again use the buying rate10.38 instead of selling rate 14.8621,can u help me
outstanding,I dont know how i could say thanks.,
I know spread the word,that is what I am doing at the moment
THANKS TO ADMIN & OPENTUITION.
It would be a crime if don’t give any feedback after getting a lot of benefit.DEAR SIR THANK YOU
I’m having problem with the server, please help.
Thanks.
you are most likely behind a firewall
contact your internet provider to open it up for you
Good discussion. I have some few tricks on this foreign xchange rates. Thanks to open tuition
Continuing with my previous comment…
Another little trick you could use is as follows,
The exchange rate spread ( $ to Pound)
1.6250 – 1.6310
Buying – Selling
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.
There is nothing difficult about this. Any difficulty you are creating is all in your mind. Just read it 3 times and you will grasp the concept.
@freshmint, even though i’m already clear on this.. but it just struck me . you could also remember BS as Bull Shit (apologize for the word but..) lol such words are easier to stick to your head..
good job with the explanations though!
@freshmint, so nice of u i really got my concept clear after reading ur comments thx alot im happppppppppppppiiiiiiiiiiiiiiiii
@freshmint, can you clear up how your technique ties in with the indian rupee question at 17 – 21 mins.
Does “buying and selling” relate to dealings with banks. While “paying and receiving” relate to dealings with customers/suppliers directly?
In the rupee example are we selling rupees to the bank (higher rate) or buying ruritanian dolllars (lower rate)? also could we be seen to be “paying” the creditor (lower rate)?
I’ve probably over-complicated it, if you could help clarify it i’d be very greatful.
People always complain that Risk Mgt is the hardest topic, but actually, it’s the most straight forward! In my opinion, all you need to do is to ask yourself:
1. Are you converting to the weaker currency or the stronger currency (base)?
2. If converting to the weaker currency, DIVIDE by the exchange rate*. If converting to the stronger currency, MULTIPLY by the rate*.
3. *But which rate are you going to use? The ‘rule’ is, you will only use the rate which is profitable to the BANK.
Apologies, there’s a slight typo in step 2 above. It should read:
2. If converting to the weaker currency, DIVIDE by the exchange rate*. If converting to the stronger currency, MULTIPLY by the rate*.
In other words,
When converting a weak currency to a strong currency, you DIVIDE.
When converting a strong currency to a weak currency, you MULTIPLY.
Hope I didn’t mystify anyone! I must double-check my comments before I post! ^_^
@freshmint, so u r saying , if u want to convert the currency infront to the denominators currency u divide the amount by the exchange rate and vice versa? ryt??? but my question is divide by which of the rates the lower or the higher or the buy sell spread isnt relevant here?? am a bit confused
@freshmint, HI
How would you know which currency is weaker than the other? For EUR and Dollar is easy ( as everybody knows) but for the others?
Many thanks
@barbara2012, For example, when you see U$D / EUR 1.5928,
it means 1 EUR = 1.5928.
Therefore, you can see that U$D, the numerator is the weaker currency and EUR, the denominator is the stronger currency.
From this you can conclude that the currency that is the numerator is always the weaker currency and the currency at the bottom is always the stronger currency.
It’s a simple rule which you can easily cram.
very well understandable. thnx open tuition.this is awesome
Can you please tell me what is SPREAD?
THANK YOU VERY MUCH!
@barbara2012, The spread is the difference between the two exchange rates (the buy and the sell rates). That is where the banks etc make their profit
I have tried million times to understand which way it goes before.Thank to you, now I have figure out which way it is.Always think company is getting the worst. I really like that
.Even the other one, when we are buying the first currency use the first figure of the spread and when we are selling the first currency use the second figure of the spread is not bad at all.Actually this can come to double check if you’ve got the figure right way round.
@edith2011 vimeo hosts some of our lectures,
Not sure why you have the message about vimeo plus
Use another browser modern browser (google chrome or apple safari) lecture works fine,
hi there good people, what is the meaning of VIMEO? Because i can’t access topics on Foreign exchange risk part (a), it says VIMEO PLUS…. What should I do???
finally sum1 who explained it well!!
..thnkyu
Clear Voice. Thanks
my best tutor from open tuition but this is proving to be my worst F9 topic so far. however, I’ve learned the basics. Thanks John.