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Lecture Multinational financial management - Topic 3: Retail foreign exchange transactions: bid-ask, cross rates, credit and debit transactions

Lecture Multinational financial management - Topic 3: Retail foreign exchange transactions: bid-ask, cross rates, credit and debit transactions. In this chapter, the learning objectives are: Students will be able to understand convert currencies using bid and ask quotations; calculate the total cost of using cash, credit or debit in forex transactions. | Topic #3: Retail Foreign Exchange Transactions: Bid-Ask, Cross Rates, Credit and Debit Transactions L. Gattis The Pennsylvania State University Finance 407: Multinational Financial Management 1 Learning Objectives 2 Students can convert currencies using bid-ask quotations cross rate calculations Students can calculate the total cost of using cash, credit or debit in forex transactions Review 3 Suppose the USDCAD is C$1.2/US$. How many USD can you buy for C$100? $83.33 $120 Review 4 Suppose the kroner exchange rate changes from Kr4/$ to Kr4.5/$. What is the appreciation of the kroner? -12.5% -11.11% +11.11% +12.5% Bid – Ask Exchange Rates 5 Travelex or American Express currency offices at the airport use one exchange rate for buying and one for selling. Listed below are the Travelex USD rates for 8/10/2010 British Pound Travelex: $1.43 – $1.85 Danish Kroner Travelex : Kr4.92 – Kr6.30 Customer buys pounds (selling dollars) at this price Customer buys dollars (selling kroner) at this . | Topic #3: Retail Foreign Exchange Transactions: Bid-Ask, Cross Rates, Credit and Debit Transactions L. Gattis The Pennsylvania State University Finance 407: Multinational Financial Management 1 Learning Objectives 2 Students can convert currencies using bid-ask quotations cross rate calculations Students can calculate the total cost of using cash, credit or debit in forex transactions Review 3 Suppose the USDCAD is C$1.2/US$. How many USD can you buy for C$100? $83.33 $120 Review 4 Suppose the kroner exchange rate changes from Kr4/$ to Kr4.5/$. What is the appreciation of the kroner? -12.5% -11.11% +11.11% +12.5% Bid – Ask Exchange Rates 5 Travelex or American Express currency offices at the airport use one exchange rate for buying and one for selling. Listed below are the Travelex USD rates for 8/10/2010 British Pound Travelex: $1.43 – $1.85 Danish Kroner Travelex : Kr4.92 – Kr6.30 Customer buys pounds (selling dollars) at this price Customer buys dollars (selling kroner) at this price Bid-Ask Quotations 6 How many Kroner can you buy for $100? Since you are buying Kroner and Selling Dollar – Use USD Bid $100 x “USD Bid” (Kr4.92/$) = Kr492 Alternative rule: Customer always loses – gets less, pays more $100 x “Lowest Rate” (Kr4.92/$) = Kr492 Bid Kr 4.92/$ – Ask Kr 6.30/ $ Price to Sell $ / Buy Kr Price Buy $ / Sell Kr Bid (Low) Price of $ Ask (High) Price of $ Bid-Ask Quotations 7 How many kroner will it cost to buy $100? Since you are buying USD and Selling kroner – Use USD ask $100 x “USD ask” (Kr6.30/$) = Kr630 Alternative rule: Customer always loses – gets less, pays more $100 x “Highest Rate” (Kr6.30/$) = Kr630 Bid Kr 4.92/$ – Ask Kr 6.30/ $ Price to Sell $ / Buy Kr Price Buy $ / Sell Kr Bid (Low) Price of $ Ask (High) Price of $ Bid-Ask and Direct-Indirect Conversions 8 1/Indirect Bid = Direct Ask 1/Indirect Ask = Direct Bid Bid Kr 4.92 – Ask Kr 6.30 / $ Bid $ 1/6.3 – Ask $ 1/4.92 / Kr Bid $ .1587 – Ask $ .2033 / Kr Price to Sell $, Buy Kr Price to Sell Kr, .