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Dear Tutor,
I wonder if you can help me here as I seem to always get confused with this.
Q1. How can I identify what exchange rate to use in a spread
Q2. How can I identify futures/options are Buy/Sell or Call/Put?
For example in Jun 11 – Casasophia Co.
I would be greatful to get some explanation and possibly a clue, mantra, mnumonic to help me remember.
Regards
Hello,
Let me try to help.
Picking d exchange rate to use has been tricky for me as well but I’ve tried to overcome it by a method.
If someone will be buying a currency, the higher rate will be given him compared to when selling. Look out for the rate that gives him a lesser amt in both cases.
2. A future/ option is a buy/call option when currency will be bought to settle a debt or anything. It is d reverse for a sell/put transaction.
If someone whose home currency is $ has a debt to settle in gbp, he has to buy gbp, so a call option.
The rule changes to d opposite if the the person whose home currency is gbp needs to settle in $ bcos there are no trades in $.
For identifying the exchange rate to use. Remember the thumb rule: Always consider yourself in the adverse position in the transaction. i.e.
-paying more, in case of payments (imports)
-and receiving less in case of receipts (exports)
Ex.
Case (i) Imports of $50000, exchange rate: 1.255-1.260 $/GBP
Being on the adverse, we should be paying more for the payment of the transaction amount, so we will be dividing it by the lower number of 1.255 i.e. $50000/1.255—
Case (ii) Receipts of $4000, exch. Rate: 1.605-1.615Gbp/$…
Applying the same rule, we should receive less being on the adverse position. $4000*1.605—I am not sure why oolayinka and syedazmat have answered here – neither of them is the tutor, and this is an Ask the Tutor forum!!
1 For choosing which rate to use when there is a spread, there are several ways of remembering it.
They way I always use is that if you are buying the first currency then you use the lower rate. If you are selling the first currency you use the higher rate.
What I mean by ‘first currency’ is as follows: is it is a $/£ quote then the first currency (the one of the left) is $’s, so my rule is for buying or selling $’s. If it is a EUR/$ quote, then the first currency is EUR, so my rule is for buying or selling EUR’s.2 For futures, what matters is the currency that the contract size is quoted in. If the contract size is quoted in $’s (for example) then if the transaction involves buying $’s then you will buy futures. If the transaction involves selling $’s then you will sell futures. Same for options.
It might help you to watch my free lectures on this where I explain the above with examples.
I’m sorry Mr. John for breaching the rules, I thought it’s an open forum. Hope I’m forgiven?
Thanks John much appreciated.
Can you kindly let me know which ones specifically to listen to for this
Thanks oolayinka and syedazmat
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