Meaning of bank sells low and buys high

Ffurqan.909y ago

Hi, At the risk of sounding like a goof I was reading on forward rates and I came up on bank sells low buys high,and I can't understand what it means bcos it seems like a loss to me? I can understand short selling where you sell high and buy low but this seems like its opposite and doesn't make sense Thanks in advance Furqan

John MoffatTutor9y ago#1

It is easier for me to explain with an example. Suppose the quote is $/€ 1.55 to 1.58 (so 1.55 or 1.58 $'s is equal to 1 €) If you are buying $'s from the bank (so the bank is selling you $'s) then you use the rate 1.55, whereas if you are selling $'s to the bank (so the bank is buying $'s) then you use 1.58. So the bank sells as the lower rate and buys at the higher rate - the difference is the way the bank makes its profits. The 'rule' can be expressed in lots of different ways. What matters most is being able to choose the correct rate to use for specific calculations in the exam, and I explain this with examples (and the logic behind it) at the start of my free lectures on foreign exchange risk management. (It has nothing to do with short selling)

Ffurqan.909y ago#2

Thanks John,I just gave my f5,f7, and f8,I was just browsing F9 to get an idea, I haven't gotten around to seeing the lectures yet,will definitely check them as OT is my main source of preparation. Thanks again

John MoffatTutor9y ago#3

You are welcome :-)

Sign into reply to this topic.