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Its funny that something many consider trivial is causing so much confusion for me..but please what is the secret to working out when to multiply or divide in exchage conversions?..i seem to find this initial stage more difficult than the other part of the solution!!..pls help..
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Hi,
Your problem, by the sounds of it, is a lack of clear understanding of how exchange rates are actually quoted.
Let me explain, say $/£ is 1.5000
What does this mean ?
Answer it is the number of $’s per single unit of the £.
So, the exchange rate could be written as $1.5000 / £1
This is what’s called an INDIRECT Quote and is usually the way exch. rates are quoted in the exam.
Therefore, an INDIRECT QUOTE shows the number of foreign currency units per SINGLE UNIT of the domestic currency (ie 1 or one).
The other possibility are DIRECT QUOTES … where the exch. rate quoted shows the number of domestic currency units per single unit of the foreign currency.
So now, what’s a $1,000 Debtor worth in £’s, if the exchange rate is $/£ 1.5 ?
Answer – 3 steps:
(1) Is the exposure on a Debtor or Creditor ? ….. ans: Debtor
(2) Are we DIVIDING or MULTIPLYING ? ,,,,,, ans: DIVIDING … ( we need £’s)
(3) Choose the rate that leaves you WORSE OFF.Well, that’s it. Understand this and you have the BASICS necessary to go forward!
Regards, Kevin Kelly
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