Sir is Foreign Risk chapter very important? I have less time and planning to be thorough with the other chapters. Will it be fine if i just go through your lectures for this particular chapter?

It is important, but not more so than other areas. The lectures cover everything needed for the exam (but try and find time to practice a few questions on it from your Revision Kit as well).

I am not going to type out here the ‘rule’ that I explain in the lectures (although I do suggest that you watch the lecture again), but think about it logically.

We are not buying Indian Rupees. We are in India and need to pay money in R$. Therefore it is R$ that we are buying. If we were able to buy them at 8.6380 then we would end up paying less. That cannot be the case – the reason for having two rates is so that the bank can make a profit! We have to buy the R$ at the higher rate which is 9.2530.

It may be presumptuous of me to give advice here ( since I read the chapter today), but I had trouble getting these as well.
Might help somebody else to figure out when to multiply when to divide

I use a small equation. Let’s use example 2
IR/$R = 9.253/1 = this is the part that is given. Your unknown is indian rupee, so you put an x in the numerator (IR is on the top) so we get 9.253/1=x/240000
Solve for x.
I still get the bid/ask wrong, but I think I will do both to see which one is higher( we pay the higher)

That is basically what the Professor was describing but making a small equation helped me to see them more clearly.

How you choose to remember it is obviously up to you, and whichever way ‘works’ for you.
With regard to deciding which of the two rates to use, by all means try both as you have written. However appreciate that you are always going to be desperately short of time in the exam, and so it would be worth learning the rule so as not to spend too much time on what will probably be just a 2 mark MCQ.

Thank you for the lectures!!! Makes a big difference to see you working through a problem.

The bid/ask thing …. I hear you, it should be easy. The thing is … you already have one in your calculator. It takes no more than 10 seconds to double check. I know, I know it’s not the right way to “learn”.

Because the quote you mention is quoting GBP per $
The example in the lecture is quoting $ per GBP.

The rule is exactly the same – if you are buying the first quoted currency then it is the lower rate. In your example from some website, you are selling USD and therefore buying GBP and therefore we use the lower rate.

Nobody is doing anything in reverse order and everything in the lecture is 100% correct 🙂

I can do no more than repeat what I wrote before. The lectures explain in detail how to deal with it and the logic involved, and it depends which way round the quote is given ($’s per GBP or GBP’s per $), which is also explained in the lectures.
You cannot simply learn rules blindly – either for the exam or in real life. If you understand what is happening then it should be clear which rate to use in each case.

Hie everyone!!! I have problem with Swap; how do you evaluate the whole process in order to determine the effective rate that has resulted by entering into Swap

I have a new way of knowing the division and multiplication. If the figure you are about to change is in the first currency then you will be dividing but if that figure is quoted in the second currency then you will be multiplying. I think that’s right?

That is fine (the small difference is irrelevant).
Although why make extra work converting the exchange rates? If this were an MCQ question then speed it vital 🙂

Dear sir,
If my base currency is home currency, I should use sell rate when I received and I should use buy rate when I have to pay. Is it correct concept?

sir if second currency is home currency …when we pay we divide by lowest (frst one)
if first currency is home curencywhen we pay we multiply by highest (second one)

Uploading your picture should not have made a difference.
Try clearing your cache and see if that helps. Otherwise go to the support page (the link is above) and hopefully you will find a solution there.

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.

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)

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.

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.

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

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.

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.

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! ????

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.

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rishabbohra98 says

Sir is Foreign Risk chapter very important? I have less time and planning to be thorough with the other chapters. Will it be fine if i just go through your lectures for this particular chapter?

John Moffat says

It is important, but not more so than other areas. The lectures cover everything needed for the exam (but try and find time to practice a few questions on it from your Revision Kit as well).

eleni1988 says

Sir, I am confused in example 2

We have to pay R$ 240000

Therefore, we have to buy Indian Rupees

Why don’t we multiply with 8.6380?

John Moffat says

I am not going to type out here the ‘rule’ that I explain in the lectures (although I do suggest that you watch the lecture again), but think about it logically.

We are not buying Indian Rupees. We are in India and need to pay money in R$. Therefore it is R$ that we are buying. If we were able to buy them at 8.6380 then we would end up paying less. That cannot be the case – the reason for having two rates is so that the bank can make a profit! We have to buy the R$ at the higher rate which is 9.2530.

bballhawk says

It may be presumptuous of me to give advice here ( since I read the chapter today), but I had trouble getting these as well.

Might help somebody else to figure out when to multiply when to divide

I use a small equation. Let’s use example 2

IR/$R = 9.253/1 = this is the part that is given. Your unknown is indian rupee, so you put an x in the numerator (IR is on the top) so we get 9.253/1=x/240000

Solve for x.

I still get the bid/ask wrong, but I think I will do both to see which one is higher( we pay the higher)

That is basically what the Professor was describing but making a small equation helped me to see them more clearly.

John Moffat says

How you choose to remember it is obviously up to you, and whichever way ‘works’ for you.

With regard to deciding which of the two rates to use, by all means try both as you have written. However appreciate that you are always going to be desperately short of time in the exam, and so it would be worth learning the rule so as not to spend too much time on what will probably be just a 2 mark MCQ.

bballhawk says

Thank you for the lectures!!! Makes a big difference to see you working through a problem.

The bid/ask thing …. I hear you, it should be easy. The thing is … you already have one in your calculator. It takes no more than 10 seconds to double check. I know, I know it’s not the right way to “learn”.

I know you hear it often, but thank you again.

John Moffat says

OK 🙂

(and thank you for your comment)

salman7 says

Dear sir,

The exchange rate you mentioned is $/£ 1.6250 – 1.6310.

The BUY rate is lower than the SELL rate.

But when I checked the website

I found that the website is mentioning the BUY rate to be higher than the SELL rate.

i.e.,: Converting USD to GBP:

Selling 1.0000 USD => you get 0.7932 GBP

Buying 1.0000 USD => you pay 0.7934 GBP

Please comment that why the currency converter site is quoting in reverse order. Thanks,

John Moffat says

Because the quote you mention is quoting GBP per $

The example in the lecture is quoting $ per GBP.

The rule is exactly the same – if you are buying the first quoted currency then it is the lower rate. In your example from some website, you are selling USD and therefore buying GBP and therefore we use the lower rate.

Nobody is doing anything in reverse order and everything in the lecture is 100% correct 🙂

salman7 says

Thank you sir for your explanation.

I again checked oandaDOTcom => Converter:

What I get for GBP/USD (selecting I have GBP and I want USD):

Selling 1.00000 GBP you get 1.26037 USD

Buying 1.00000 GBP you pay 1.26060 USD

Again here the buy rate is more than the sell rate.

I just want to be clear on this, so that I can practice it in my job.

Thanks,

John Moffat says

I can do no more than repeat what I wrote before. The lectures explain in detail how to deal with it and the logic involved, and it depends which way round the quote is given ($’s per GBP or GBP’s per $), which is also explained in the lectures.

You cannot simply learn rules blindly – either for the exam or in real life. If you understand what is happening then it should be clear which rate to use in each case.

wchawanda says

Hie everyone!!! I have problem with Swap; how do you evaluate the whole process in order to determine the effective rate that has resulted by entering into Swap

John Moffat says

Evaluating a swap is not in the syllabus for F9 – it is examinable in Paper P4.

There are lectures on it in P4.

Ernest says

Hi John,

I have a new way of knowing the division and multiplication. If the figure you are about to change is in the first currency then you will be dividing but if that figure is quoted in the second currency then you will be multiplying. I think that’s right?

acaqub says

Dear John,

I have another approach:

euro/yan 0.8010-0.9230

we than could convert the exchange rate as we are in the euro zone:

1/0.8010=1.2484

1/0.230=1.0834

we could get

yan/euro 1.0834-1.2484

we receive yan so we sell yan for euros

1,000,000/1.2484= 801,025 euros

what do you think about my approach?

many thanks!

regards,

John Moffat says

That is fine (the small difference is irrelevant).

Although why make extra work converting the exchange rates? If this were an MCQ question then speed it vital 🙂

acaqub says

Many thanks John!

Sorry for the late reply.

John Moffat says

You are welcome 🙂

kafi says

Dear sir,

If my base currency is home currency, I should use sell rate when I received and I should use buy rate when I have to pay. Is it correct concept?

armaghanbutt says

sir if second currency is home currency …when we pay we divide by lowest (frst one)

if first currency is home curencywhen we pay we multiply by highest (second one)

John Moffat says

It depends whether you are receiving or paying the other currency as to which of the two rates you use.

armaghanbutt says

i mean if paying we will use rates which i mentioned earlier ..are they right ?

John Moffat says

Yes – now you are right 🙂

Bola says

Hello sir,

I am having difficulty viewing Chapter 22 of your lecture after uploading my picture. Could you help me out please.

John Moffat says

Uploading your picture should not have made a difference.

Try clearing your cache and see if that helps. Otherwise go to the support page (the link is above) and hopefully you will find a solution there.

Bola says

I got it. Thank you sir.

yetunde 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.

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)

yetunde says

thank you sir,may God bless you.appreicate t

yetunde says

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

Bonne weekend!

sonia 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

John Moffat 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.

beatrice says

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

beatrice says

i got it figured out ????

shamela12 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

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.

shamela12 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.

padmanaveen says

Thank u…

I now understand better….

John Moffat says

Great 🙂

rehan1o1 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

John Moffat says

If you spend £100 buying dollars you will receive $162.50.

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!!)

rehan1o1 says

Thank you Sir 🙂

juewel169 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.

makramm says

excellent lectur

Queenie 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.

Queenie 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.