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Currency risk management

 The rate given for a transaction with immediate delivery is the spot rate. In
practice this means it will be settled within two working days.

 Using a different currency exchange rate to find the exchange rate of the
currency required is known as cross rates.

Example 2

A UK based company has recently purchased some goods from a European
supplier and has to pay them €85,000.

You have the following information regarding exchange rates:

USD1/EUR0.8600

USD1/GBP0.7700

What is the cost in GBP? (Give your answer to the nearest whole number)

Solution

The GBP1/EUR cross rate will be calculated as:

0.8600/0.7700 = 1.1169

i.e. GBP1/EUR1.1169

The cost in GBP is:

EUR85,000/1.1169 = GBP76,104

Or

EUR to USD:

85,000/0.8600 = USD98,837

USD to GBP:

98,837 × 0.7700 = GBP76,104

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