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charlottecallaghanclarke 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…

Thank you in advance

Charlotte

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.

charlottecallaghanclarke 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! ????

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.

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 ?

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.

hamzaharoon says

Thank You Sir, it is so Hard to Understand and Grasp This Concept, Thanks for Correcting me

chandhini says

Mr.John, we are receiving Yen, so we would be exchanging euros for yen, ie, we would be selling euros, not yen. Am i right here? I didnt get the logic :/

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 )

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?

John Moffat says

You are welcome.

The lectures are playing properly – I can only guess that your internet connection gets slower in the evenings

chandhini says

I am*.. These typos make me seem like a dunce!

neilsolaris 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.

John Moffat says

Yes – what you say is correct.

neilsolaris says

Thanks, I think I’ve got it now!

kriselda says

Thanks a lot that was my biggest problem multiplying or dividing…. no problem finding the correct currency to use my problem was multiplying or dividing…… i set out 4 rules in order to get it right but this way is much simplier

faser 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).

irum says

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