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According to the standard answer, in the step two, we are converting € into $ at spot rate. Why we should use the rate 1.7694 instead of 1.8306? I think the bank will always give us less money when we’re transfering currency? Please help me!
They are buying €’s and so we divide by the €/$ exchange rate. Using the lower rate will mean that it is costing them more $’s than if they divided by the higher exchange rate. It is always whichever rate is worse off for the company (because the banks make their profit from the spread).
Do watch my free lectures on the management of exchange rate risk, because I spend time initially working through examples about how to decide always which exchange rate to use.
The lectures are a complete free course for Paper FM and cover everything needed to be able to pass the exam well.
Got it, and I have checked lectures out it is wonderful! Thank you so much sir!
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