ABC company based in the UK, where the currency is the UK £. The company owes an amount of $200,000 to a supplier in the US where the currency is US$. The current exchange rate is given as such: £/$ 6.9080 – 7.5230
How many UK Pounds will ABC Company have to pay?
[My answer]
This is the payment case since we are owed the amount of $200,000. So, we need to sell £'s to buy $'s
$200,000 / 7.5230 = £26,585
[This is somewhat the same example as you have explained in one of your lectures but please correct me if I am wrong anywhere what I wrote above!]
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Exchange rate risk
5y ago#1The way you have quoted the exchange rate means that 1 $ equals 6.9080 - 7.5230 Pounds.
Therefore to pay $200,000 will cost 200,000 x 7.5230 Pounds
Sir, how do you really find out whether you have to multiply or divide the Foreign currency with the respective exchange rate?
I am having a problem because I don't know why you did not divide in your answer!
And secondly, This is the payment case since we are owed the amount of $200,000. So we need to sell £’s to buy $’s [correct?]
5y ago#3As I wrote in my previous reply, the exchange rate as you have quoted it means that 1$ is equal to 6.9080 - 7.5230 pounds.
Therefore 2 $'s is equal to twice as many pounds; 3 $'s is equal to 3 times as many pounds, and so on.
We need 200,000 $'s so it is 200,000 times the pound equivalent.
It is a payment of $'s and therefore we will indeed sell Pounds in order to buy $'s. The fact that the exchange rate is quoted as Pound/Dollar, then selling Pounds means using the higher rate of 7.5230.
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