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Sir, in forward rate question,
BOULLAIN (Euro) will receive $18600 in 6 months time,Exchange rates (quoted as €/US$1)
Six months forward 0·8729–0·8744As boullain will receive $18600, so 0.8744 should be used, but why they have used 0.8729??
In future you must ask in the Ask the Tutor Forum if you want me to answer. This forum is for students to help each other.
Because the rates are quoted for the Euro against the dollar, the first rate (0.8729) is for buying Euros and the second rate (0.8744) is for selling Euros.
Here they are receiving $’s and will therefore need to sell the $’s and so buy €`, so the relevant rate is 0.8729.
(Or, if you prefer, given that the spread exists so that the bank can make a profit, the company has to use the rate that is worse for them! Using 0.8729 will mean a lower € receipt than if they used 0.8744.)
I do spend time (with examples) explaining which rate to use and how to use it in the first of my free lectures on foreign exchange risk management.
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