Page 235 - Microsoft Word - 00 ACCA F9 IWB prelims 2017.docx

Foreign exchange risk

Question 3

Bid and offer prices

The € rate per £ is quoted as €1.153 – €1.158 = £1.

Company X wants to sell €1,000,000 to buy sterling.

Company Z wants to buy €1,000,000 by selling sterling

What rate will the bank offer each company?

€ per £ – look to what the bank does with €

Company X. Company sells € so bank buys € – bank buys high so use 1.158

€1,000,000/1.158 = £863,558

Company Z. Company buys € so bank buys € – bank sells low so use 1.153

€1,000,000/1.153 = £867,303

NB: the bank always uses the rate that is favourable to itself.

Illustrations and further practice

Now try TYU question 3 from Chapter 13.

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