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dear tutor
i read you notes and see the videos also .i am clear with the concept that when to use which rate ( very well explained – the company is selling the currency or buying ) i am really confuse with when to divide and multiply
this is something i am not getting 🙁 .always do wrong 🙁
please explainNow I am confuse with using rates also. Risk management is the hardest and most confusing part of F9
from open tuition lectures
What I get is ” when we are paying first we have to sell our currency and buy foreign currency for that we use selling rate that is second one and vice versa . Please tell me whether I an right or wrong . I am really confuse with this topic.Always look at the way the currency is quoted.
If it says $/£ 1.50 (for example) then it means that 1.50 of the first currency ($’s) = 1 of the second currency (£’s).
So, if 1.50 $’s is equal to 1 £, and you want to convert $’s to £’s then you divide by the exchange rate. (So $150,000 = £100,000 )
In the course notes I had an example with invented currencies, but in the exam it is almost certain to be either $/£ or EUR/£.
With regard to which rate to use, remember that it is always the rate that is worse for the company (it is the bank who makes the profit out of having two rates).
Again, if it is a $/£ quite then the rule is this:
If the company is having to pay dollars to a supplier, then they will need to buy dollars from the bank and you convert using the first/lower exchange rate. (Think about it – if you divided by the higher exchange rate it would end up costing you less, and that cannot be possible).
If the company is receiving dollars from a customer, then they will need to sell dollars to the bank and you convert at the second/higher exchange rate.
Do not get too stressed about it – it was asked in last times exam which has to make it a bit less likely this time.
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