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Dear John!
Could you please help me with rule on echange rates. Here is an example from BPP (Study text, ‘Dollar receipts’). I’m trying to solve using the rule from lectures (the lowest rate – we buy a first currency), and receive a different result from BPP’s one.
Question:
Calculate how many dollars an exporter would receive or how many dollars the importer would pay;
1. A US exporter receives a payment from a Danish customer of 150,000 kr
2. A US importer buys goods from a Japanese supplier and pays 1 mln yen.Rates;
$/Danish Kr 9,430-9,5380
$/Yen 203,650-205,781Answer from BPP:
1. 150,000/9,5380 = $15,726
2. 1,000,000/203,650= $4,910My answer;
1. If we receive krones, then we need to sell them and buy dollars. If 1kr=9 $, then 150.000 kr = (150,000*9,4340)$
2. we need to buy yen, so to sell dollars: 1,000,000/205,781So where is a mistake?
Thank you in advance!!!
Anna
The question has treated the exchange rates on the basis that they are quoted the other way round (i.e. that 203,650 yen are equal to 1 dollar). In practice, exchange rates often are quoted that way round, but in the exam it is as per the rule in my lecture unless (obviously) the question makes it clear that it is different. I don’t know if the BPP question said any more about the way the exchange rates are quoted, but if they didn’t then strictly (for the exam) they are wrong.
(In fact, there are in real life many more yen to the dollar than dollars to the yen, and so even though they have quoted the rate the wrong way round it is actually logical, however the examiner cannot expect you to know that.)
Dear John!
Thank you very much! I’ll be carefull then with rates from BPP questions:) as for dollars and yen it’s clear what currency rate is, but I was afraid if I undertand the rule corretcly. Now I’m more confident with it. Thank you!
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