CROSS RATES - WASHI SEP 2018 (KAPLAN EXAM KIT)

Jjoevassallo5y ago

Hi John I cannot get round my head how cross rates have been worked/derived in this question: Spot rates JPY per €1 are 129.2-132.40 Spot rates ARD per €1 are 92.7-95.60 Inflation in Airone (currency ARD) is 9% Inflation in Japan (currency JPY) is 1.5% I need to convert ARD 10,150m to JPY.... Can you please assist? Thank you.

John MoffatTutor5y ago#1

1 EUR buys 92.7 ARD, and 132.4 JPY will buy 1 EUR Therefore 132.4 JPY will buy 92.7 ARD Therefore 1 JPY will buy 92.7/132.4 = 0.70 ARD It is the same logic for the other rate :-)

SSimone3y ago#2

Why do we use the 0.70 and not the 0.74 exchange rate for the investment appraisal? Since we transfer ARD to YPY, we sell ARD?

John MoffatTutor3y ago#3

You are correct. For some of the flows the examiner should have used the other cross rate.

Sign into reply to this topic.