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# Foreign Currency Management Pdf

Foreign Currency Management Exchange Rate This is the rate at which the currency of one country would change hands with currency of another country. E. g.

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\$1 = SLR 130 Types of Exchange Rate 1. Floating Rate This rate depends on a levels of the international trade of a country and it does not interfere with the government of that country. 2. Fixed Rate This is the rate that the government of the country would set its own currency rate and it is not depending on the market rate. 3. Dirty Float This is the rate that mixed between floating rate and fixed rate system.

This is where the government would allow exchange rate to float between a particular two limits. If it goes outside either of the limit, then the government would take further action. Forex Dealings 1. Bid Price The price at which the currency is bought by the dealer. 2. Offer Price The price at which the currency is sold by the dealer. When regarding the forex dealings, Offer Price > Bid Price Example 01: David is a UK businessman. He needs \$ 400,000 to buy US equipment. Identify the amount of ? equired to buy the Dollars? (\$/? 1. 75 – 1. 77) Answer: The amount of ? required = \$ 400,000 \$/? 1. 75 = ? 228571. 43 Example 02: James is a US businessman. He has just received a payment of ? 150,000 from his main customer in UK. Identify the amount of \$ received by James when ? 150,000 are given? (? /\$ 0. 61 – 0. 63) Answer: The amount of \$ received = ? 150,000 ? /\$ 0. 63 = \$ 238095. 24 Spot Rate and Forward Rate Spot Rate This is the rate which is applicable for the immediate delivery of currency as at now.

ABC Ltd is a US company, buying goods from Sri Lanka which cost SLR 200,000. These goods are resold in the US for \$2000 at the time of the import purchased. The current spot rate is \$1 = SLR 126-130. Calculate the expected profit of the resale in terms of US Dollars using both direct & indirect quote methods. Answer: 1. ) Under Direct Quote Method \$/SLR = 1/126 – 1/130 = 0. 00794 – 0. 00769 Sales = \$2000 (-)Purchase Cost=SLR200,000*\$/SLR0. 00794 =(\$1588) Expected Profit = \$412 2. ) Under Indirect Quote Method Sales (-)Purchase Cost=SLR200,000/SLR126/\$ Expected Profit = \$2000 =(\$1587) = \$413

Managing the Exchange Rate Risk 1. Invoicing in domestic currency Since the exporter does not have to do any currency transaction in this method, the risk of currency conversion is transferred to the importer or vice versa. 2. Money Market Hedging Because of the close relationship between forward exchange rate and the interest rate in two currencies, it is possible to calculate a forward rate by using the spot exchange rate and money market lending or borrowing which is called as a money market hedge.