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Hi again John!
The question 1 (Washi) in September 2018 exam.
Could you please explain where am i wrong in the following ?Situation – We are in Japan (JPY). We receive ARD and need to convert them into JPY for NPV calculation.
1 step – We receive ARD and convert them into EUR – so we use the higher rate of 95.6 ARD/EUR (because we pay more ARD to bank for 1 EUR).
2 step – We convert our EUR into JPY – here we use lower rate of 129.2 JPY/1 EUR because bank will give us less JPY for 1 EUR, leaving spread as its fee for conversion.
3 step – Deriving our spot rate – From steps 1 and 2 above we can derive the spot rate we will use in our calculation of NPV:
It is JPY/ARD (129.2/95.6) = 1.3515 or (reverse) ARD/JPY (95.6/129.2) = 0.74.But why examiner use 0.70 in the answer instead of 0.74? Where am i wrong?
Nick
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