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Business valuations and market efficiency
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.
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