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Z is due to pay $2000,000 in 2 months time.
Spot $/pound 1.6550+/- 0.0018
2m forward $/pound 1.6623+/- 0.0020how much will Z pay?
My working below is that
2months forward rate Lower 1.6603 – 1.6643 Higher
pay
$200,000/ 1.6603 = pound 120,460.
but in this working, why did you make use of 1.6603 that is lower one rather than higher one?
Silly question but I expect your clear explanation.
Finally sir, I passed F8 one day ago with the first attempt, F9 will be my final exam in F level….
you helped so much in F5 that was hell to me. I was stuck with F5 for almost 1 year and a half….
Honestly, your lecture is the most outstanding among the others even if it seems that i rather assault other professionals.
many thanks Sir. John Moffat
The difference between the two rates is how the banks make their profit – one rate when you buy the currency and a different rate when you sell the currency to them.
Therefore the rate we use is always whichever is worst for us.
Here they are paying money. If you converted at 1.6643 then you would find it would be costing them fewer Pounds, which cannot be the case 🙂
(If they were receiving dollars then you would convert using the higher rate – that would give the smallest receipt).
Do watch my free lectures on this – it is the first of the lectures on foreign exchange risk management – because I do explain the rule and the reason, with several examples.
(And thank you very much for your comments 🙂 )
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