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F9-Challenge for the day-Today-6th June 2012
I have a question here for which I would want the answer clarified please:A bank quotes USD/EUR as 1.3520 – 1.3540 to its client. The client buys US Dollars at which rate?
A. 1.3530
B. 0.7396
C. 1.3520
D. 1.3540As per my Kaplan Notes
1.3520-the lower “bid” price
1.3540-the higher “offer” price
In the above question if the client wants to buy the base currency i.e. the USD(client must have EUR the variable currency and willing to sell) then the bank would have to BUY the variable currency EUR in exchange for the base currency.
ANSWER:The higher rate,1.3540,is the rate at which the bank will buy the variable currency-EUR in exchange for the base currency-USD.
The answer must be D.
But they say it is C
Actually it interprets to either 1.3520 USD = 1EURO or 1.3540 USD = 1 Euro. Now to buy say 1000 USD the rate will be either (1/1.3520)* 1000 or (1/1.3540)*1000 but as a rule always choose option that leaves you worse off so for buy option that leads to higher cost and that one is C. Hope it helps
Hi Kodwo,
There’s two ways you can look at this
1) “Bank Buys High – sounds like bye bye” “Bank Sells Low sounds like hello” = so if the company wants to buy then the bank will sell and do so at the low rate.
2) or calculate it = lets say company wants $100 so the company will buy and the bank will sell. The bank can sell at $100/€1.3520 and get €73.96 or it can sell at the high rate = $100/€1.3540 and get €73.85. Clearly the bank will want the higher proceeds and will therefore sell at the low rate.
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