Comments

  1. avatar 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.

    • Profile photo of John Moffat 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)

  2. avatar 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

    • Profile photo of John Moffat 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.

  3. avatar 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

  4. avatar 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.

    • Profile photo of John Moffat 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.

      • avatar 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! ????

    • Profile photo of hamzaharoon says

      @charlottecallaghanclarke A Trick for you:

      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.

  5. Profile photo of hamzaharoon says

    Sir What I Understood is this, Please do correct me If I am wrong:

    I am from Pakistan and Currency here is Pakistani Rupee which is Call PKR in short. Suppose If I write PKR/$ and I am in Pakistan which is my base country then Consider Following Situations :

    Exchange Rates say (1.4 – 2.1)

    1)I Recieve say 5000$ From U.S

    $—–>PKR ( Multiply by 1.4) or you can say 2nd to 1st is Multiply IF you are In First Country and 1.4 because it is worst rate for us but not for bank from where we are buying PKR

    2)Pay 5000$ to U.S

    PKR—–>$ (Multiply by 2.1) or you can say 1st to 2nd is Multiply IF you are in First Country and 2.1 because it is worst rate for us but not for bank from where we are selling PKR

    Now Consider I am in U.S which is now my base country and second here still (Exchange Rates Same)

    3) I Recieve 15000 PKR

    PKR—–>$ (Divide by 1.4) or You can say 2nd to 1st is Divide IF you are in Second Country and 1.4 is again worst for us and not the bank

    4) I Pay 15000 PKR

    $—–>PKR (Divide by 2.1) or You can say 2nd to 1st is Divide IF you are in Second Country and 2.1 is again worst for us and not the bank

    Am I Correct Sir ?

    • Profile photo of John Moffat says

      You are correct for the first 2, but wrong for the second 2.

      If you receive PKR then dividing by the bigger number (2.1) is worse for you.
      If you pay PKR then dividing by the smaller number (1,4) is worse for you.

    • Profile photo of John Moffat says

      No.

      If we are in the Eurozone and we receive yen, then we need to sell the yen to the bank in order to get euros. (Or if you prefer, we will buy euros from the bank and pay for them with yen – same thing :-) )

      • Profile photo of chandhini says

        Oh yeah, I missed that point.. Thank you Mr.John :D.
        However, the lectures are not playing properly at evening and night times.. I having to buffer it numerous times, both at the start and during the lectures.. That might be the reason I raised that silly doubt :)
        Could you please look into the matter? 😀

  6. avatar says

    Would I be correct in saying that if the company is in the 2nd currency listed (i.e. if it states £/€ and you are in Euroland, then you are the 2nd currency) then you DIVIDE by either the buy or sell figure (depending whether you are buying or selling)? If your company is in the 1st currency listed then you MULTIPLY by the buy or sell figure?

    Thanks for your help.

  7. avatar says

    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).

  8. Profile photo of freshmint says

    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.

    • avatar says

      @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!

    • avatar says

      @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.

  9. Profile photo of freshmint says

    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.

    • Profile photo of freshmint says

      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! ^_^

      • avatar says

        @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

      • Profile photo of freshmint says

        @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.

  10. avatar says

    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.

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