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cross rate determination :
A UK company has a Greek subsidiary which is to purchase materials costing $100,000. The NPV of the overseas cash flows is being calculated in Euros, but you have not been provided with the euro/dollar exchange rate. Instead you have the following information :
1)
dollar/pound 1.90
euro/pound 1.452)
dollar/pound 1.90
pound/euro 1.45requirement : Calculate the value of purchase in euros ( sir pls use cross rate for each of the two above situation and show how you calculate cross rate )
Think about it logically…..
in (1), 1.90 dollars = 1 pound; and 1.45 euros = 1 pound.
Therefore, 1.90 dollars = 1.45 euros
Therefore 1 dollar = 1.45/1.90 eurosIn (2), 1.90 dollars = 1 pound. 1.45 pounds = 1 euro
Therefore 1 pound = 1/1.45 euros
Therefore 1.90 dollars = 1/1.45 euros
Therefore 1 dollar = 1/(1.45 x 1.90) eurosPresumably you have an answer in the same book in which you found the question, so you can complete the rest of the question yourself 🙂
I assume that you have watched all my free lectures on foreign exchange and foreign exchange risk management?
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