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ACCA Applied Skills · Financial Management · Hedging techniques for foreign currency risk

The spot rate for the euro against the dollar is quoted as €0.9200–0.9250 per US$1. A company needs to buy euros with dollars today. Which rate applies and how many euros will it receive for US$100,000?

The company is selling dollars to the bank, and the bank always uses the rate less favourable to the customer, which is the lower number of euros per dollar, 0.9200. So US$100,000 converts to €92,000.

  1. A€92,000, because the bank sells dollars at the lower rate
  2. B€92,500, because the bank buys dollars at the higher rate
  3. C€92,500, because the bank sells dollars at the lower rate
  4. D€92,000, because the bank buys dollars at the lower rateCorrect

Explanation

The quote is euros per dollar, and the company sells dollars to the bank, so the bank buys dollars. The bank gives the fewer euros, the lower rate of 0.9200. 100,000 × 0.9200 = €92,000. Using 0.9250 would give the customer a better rate than the bank offers.

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