ACCA Applied Skills · Financial Management · Causes of exchange rate differences and interest rate fluctuations
A bank quotes the spot rate for the USD/EUR pair as 1.0850 – 1.0920 (euros per 1 US dollar). A US exporter wishes to sell EUR 218,400 to the bank. How many US dollars will the exporter receive?
The exporter receives USD 200,000. The bank is selling dollars, so it uses the less favourable rate of 1.0920 euros per dollar, and 218,400 divided by 1.0920 equals 200,000. Using 1.0850 would wrongly give the rate for the bank buying dollars.
- AUSD 200,000Correct
- BUSD 201,290
- CUSD 236,964
- DUSD 237,000
Explanation
The bank buys euros and sells dollars, so the exporter gets the less favourable rate, which is the higher euro figure per dollar: 1.0920. 218,400 / 1.0920 = USD 200,000. Using 1.0850 gives USD 201,290, which is the rate at which the bank buys dollars, not euros.
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