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There is a company in Tanzania which orders tv sets from uk which are then shipped to uganda customers, and finally the uganda customer pays the tanzania seller upon delivery. the cost of 1 tv is 200 Uk pounds
Th spot rates are as follows inTanzania
Uganda shiling / 1 Tanzania shillings
Bid – Ask
3 – 4Tanzania shillings / 1 Uk pounds
Bid – Ask
2700 – 2800If a ugandan customer makes an order for 1 tv so the tanzanian will have to buy Uk pounds at 2800 (ask rate) at 200 uk pounds x 2800 = 560,000 tanzanian shs/
If the customer in uganda is invoced in 200,000 Ugandan shillings by the tanzanian seller, how much will the tanzanian recieve?
I am confused because the answer to this has written that the uganda customer will pay tanzanian seller at the ask rate of 4 thus paying 200,000 x 4 = 800,000 tanzanian shillings,
i thought that the when the customer sends 200,000 uganda shillings to tanzania, the tanzanian would convert the ugandan shillings to tanzanian shillings by using the bid rate of 3 uganda shillings for each Tanzanian shilling and earning 200,0000 x 3 = 600,000 tanzanian shillings
Regards,
The answer is correct. The reason for having two rates is so that the bank can make a profit – it is always whichever rate is worse for the company that is converting the money.
Given that the tanzanian is buying ugandan shillings they will have to pay 4 tanzanian for every 1 ugandans.I do suggest you watch my free lectures on how to decide which rate to use – it is in the first of the lectures on foreign exchange risk management.
sorry for intruding here John, but I am confused here.
When Tanzanian seller receives 200000 Ugandan shillings. It will sell 4 ugandan shillings for which it will get 1 tanzanian shilling. So the receipt shouldn’t be 200000/4=50000 tanzanian shillings? Why are we multiplying here?
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