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Foreign Exchange. PF-L5 Objectives: Perform Calculations relating to Foreign Exchange. Learning Outcome B-1.
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Foreign Exchange PF-L5 Objectives:Perform Calculations relating to Foreign Exchange Learning Outcome B-1
Banks and credit unions can supply foreign exchange rates on request. These rates fluctuate daily and, in fact, some rates change so often that these institutions will not quote the rates until the actual time of the transaction. For example, one day at 9:00 a.m. the US dollar might equal 1.5238 and at 1:00 p.m. the US dollar could be 1.5236. Theory – Unit Pricing Intro
Did you know that people buy and sell money quite commonly?Let us suppose that you have 100 Canadian dollars and you want to convert them to American dollars for a trip to Florida. At the bank, you will hand over your money and receive the American money in return. In reality, the transaction that has taken place is that you sold your Canadian funds to the bank who paid you in American funds. Another way to look at the transaction is that you purchased American funds from the bank and used Canadian dollars as payment. Theory – Calculating Unit Prices
In this example, Canadian currency is worth less than American; you didn't get $100 American for $100 Canadian. But there is more to the story. In our scenario, you have the good luck to get a credit card from your parents and you return home with the American dollars that you had purchased. You return to the bank to sell the American funds and are surprised to get less than the $100 Canadian that you started with. It turns out that financial institutions make a profit on buying and selling currencies. They will buy back your American dollars for less money than you paid for them. Example – Calculating Unit Price
The ways in which foreign exchange rates are stated by institutions vary, but most will state a buying rate and a selling rate. Some lists will state the values from the customer's point of view and others will state the values from the institution's point of view. This is sometimes confusing, but remember that the higher rate is always the rate at which the bank charges the customer and the lower rate is always the rate at which the bank will buy the currency from the customer. Theory – Other Factors
Instead of buying and selling money, we will look at a more familiar example where money is exchanged for a product.Your uncle buys and then sells vegetables from his market-garden stand. He has asked you to help with the business. One day you are asked to pick up 100 kg of carrots. You buy them from the wholesaler at $1.35 / kg. At the vegetable stand, you plan to sell them for $2.35 / kg. You buy at one price and sell at a higher price. The increase will cover transportation, spoilage, other operating costs, and also the profit.If the banking example is applied, then money is the product and the difference between buying and selling price is one way that banks earn money to pay expenses and make profits.The example of buying and selling funds gets more complicated because the value of the money being purchased is not the same as the money used to pay for it. Theory – Produce Example
At your local bank, the buying rate for the Mexican peso is $0.1454 and the selling rate is $0.1660. These are the rates at which the bank will buy and sell. This means that if you (the customer) buy, you will pay their selling rate. For example, if you buy 200 pesos, they will sell them to you for $0.1660 x 200 = $ 33.20 CDN.Notice that there are two things happening. One is the difference in the value of the currencies, pesos compared to dollars. The other is the difference in the buy/sell rates. If you changed your mind and immediately wanted to sell the pesos back to the bank, you would receive $0.1454 x 200 = $29.08 CDN. Theory – Buying & Selling
We will use the Currency Exchange table shown below for the calculations in the following examples. All decimal values represent Canadian Dollars. Exchange Rate Table
