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Forex problem

Niharika (Student CA Final ) (77 Points)

20 June 2014

Hiii All

While doing Forex sums, i am facing problems/Confusions. Please let me know whether we will get different answers while doing forex sums on the basis of "Customer Point of View" & "Bank point of view"??

I am very much confused in this regard, requesting you all to please help me on the same.

Thanks

Niharika

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25 Replies

Rahul (Chartered Accountnat CS) (1580 Points)
Replied 20 June 2014

Hi niharika

While solving questions of forex ALWAYZ think from BANK's point of view as the bank is the quote provider.

In forex, there is generally no chance of getting different answers

JAINENDRA JAIN (ACS/CA) (1668 Points)
Replied 20 June 2014

THE RATES ARE GENRALLY QOUTED BY BANK AS BID RATE(PURCHASE)/ASK RATE (SALE RATE).

THANT MEANS IF YOU WANT TO PURCHASE CURRENCY FROM THE RATE MENTIONED IN ABOVE FORMS, THAN ON THE OTHER SIDE BANK IS SELLING - IN THAT CASE USE ASK RATE.(I.E. BANK SELLING RATE)

ON THE OTHER HAND IF YOU ARE SELLING THE CURRENCY THAN BANK IS PURCHASING THAN USE BID RATE(I.E. BANK IS PURCHASING RATE)

HOPE IT GET CLEAR TO YOU.

REGARDS

Niharika (Student CA Final ) (77 Points)
Replied 20 June 2014

Thanks for quick response.

actually i am very much clear from Bank point of view (as i done it from JB Gupta Sir DVDs) but Sanjay Saraaf sir is teaching us to solve the problems from Customer point of view only....so i am very much confused and got stuck in Divide/Multiply rule.

JAINENDRA JAIN (ACS/CA) (1668 Points)
Replied 20 June 2014

think that you are customer.and consider the rate mentioned is from bank point of view.

since you are clear with bank point of view so now consider that what is bank purchse rate is your selling rate and when you know this is bank selling rate that means from customer point of view it is purchase rate (bid rate)

1 Like

JAINENDRA JAIN (ACS/CA) (1668 Points)
Replied 20 June 2014

dont mind but if you want more clarification than better have a conversation because this think cant be explained in writting here and would be more clear through discussion.

JAINENDRA JAIN (ACS/CA) (1668 Points)
Replied 20 June 2014

just think opposite of bank view for customer point of view.

Niharika (Student CA Final ) (77 Points)
Replied 20 June 2014

Thanks for helping me Sir

I am very much disappointed as i am unable to clear the concept even after spending too much time & solving too many problems...then again stuck on any point.....anyways will try to clear it keeping in mind your tips.

Thanks

Niharika (Student CA Final ) (77 Points)
Replied 20 June 2014

Will u please solve this?

USA firm recieved Euro 120000.

1$= Euro 0.7937/0.800

What would be ur answer?

Sorry, but i hope it perhaps it will clear my doubt.

JAINENDRA JAIN (ACS/CA) (1668 Points)
Replied 20 June 2014

to convert this euro customer needs to sell euro and buy dollar.

assuming the rte mentiones are of bank rate than as per banks view for buyying dollar rate is 0.7937 and for selling by bank rate is 0.800.

note that you are selling euro and buying dollar that means bank is selling dollar and as said above bank selling rate is 0.8000.

therefore use selling rate as 0.800 and after conversion it will get 120000/0.8000=dollar 150000.

regards

Rahul Bansal (Finalist) (35929 Points)
Replied 20 June 2014

Originally posted by : Niharika
	Will u please solve this? USA firm recieved Euro 120000. 1$= Euro 0.7937/0.800 What would be ur answer? Sorry, but i hope it perhaps it will clear my doubt.

USA Firm is our client. The home currency of USA is “$”. USA received Euro ( i.e. foreign currency).

USA needs to convert foreign currency into it’s home currency.

Therefore, convert Euro into US$.

In the given case, the foreign exchange rate given is:

1$= Euro 0.7937/0.8000

It is “INDIRECT QUOTE” since there is one unit of home currency ( i.e. 1 $) and corresponding units is of foreign currency ( i.e., Euro ).

Identify the left hand currency. It’s “$”.

Always think from “Bank point of view”.

Bank always buy left hand currency at Bid Rate and bank always sells left hand currency at ask rate.

We know that when left hand currency (“$”) is moving towards bank, then it means that Bank is buying $ at Bid Rate whereas when left hand currency (“$”) is moving towards customer the it means that Bank is selling $ at Ask rate.

In our case, $ is a left hand currency. We received income in Euro ( i.e. in foreign currency
). So, as per client point of view, we are selling Euro whereas buying $ from Bank.

In other words, Bank is Selling $ to the client and buying Euro from the client.

So, Keeping in mind the requirements of client and consider from bank point of view, bank will “sell” $ at ask rate (i.e. 0.8000).

Hence, 1$ = Euro 0.8000

And,

USA firm recieved Euro 120000.

It means USA received equivalent home currency (i.e. $ ) would be:

{(Euro 120000 * $1 )/Euro 0.8000} => $ 1,50,000.

Hence, The bank buys Euro 120000 for $ 150000, In other words, USA Firm receives $ 150000.

Hence,

My efforts to make the concept is now clear to you.

Please give response for the same.

Regards

Rahul Bansal

CA Final

ACMA M.Abdul Khaliq (CMA) (214 Points)
Replied 20 June 2014

Bank always wins

ROUNAK AGARWAL (SMAP ENGINEERING PVT LTD.) (289 Points)
Replied 20 June 2014

A whatzup group has been initiatd by mee for study discusions fr nov examinees . U can join . 09831869709 Rounak .

CMA ragini jha (final yr student) (49 Points)
Replied 21 June 2014

Hi Niharika.. I too used to get stuck in such forex questions then I did analysis of many problems and made a formula for me..it is so simple and easy..now I can solve all question in a jiffy. I want to share with you..give me ur e-mail id in my PM. I will mail you.