Foreign Exchange Math Solution

Foreign Exchange Math Solution

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Foreign Exchange Math Solution

Problem: An exporter has presented an export bill for Euro 50,000 for negotiation on your bank. By using the following particulars, determine the Euro exchange rate of your bank to purchase the export bill and also determine what amount will be credited to the exporter’s account:

(a)      Bill amount- Euro 50,000
(b)     Bill Period- 60 days
(c)      Transit Period- 10 days
(d)     Interest Rate- 5% (Annually)
(e)      Profit Margin- BDT 0.10 per Euro
(f)      Postage Charge- 1/32%
(g)     Existing Exchange Rate: Euro 1 = USD 1.2215-1.2212
USD 1 = BDT 68.5800-68.5000
(360 days per year is to be considered for calculation.)


Given Exchange Rate
Euro 1 = USD 1.2215-1.2212
USD 1 = BDT 68.5800-68.5000

In case of USD-BDT exchange rate, domestic currency (BDT) is flexible and foreign currency (USD) is fixed. So, USD-BDT rate is a Direct Exchange Rate. The maxim of Direct Exchange Rate is, “Buy Low, Sell High”. Therefore, the exchange rate of USD-BDT is to be:

USD 1 = BDT 68.5000

It is assumed that local dealer bank will collect the Euro and sell the Euro in order to buy USD from international Money Market. International dealer will purchase Euro in exchange of less amount of USD. So, the Euro-USD exchange rate for local dealer bank is to be:

Euro 1 = USD 1.2212
Now, Euro 1 = 1.2212*1 USD
Euro 1 = 1.2212*68.5000 BDT        [USD 1 = BDT 68.5000] Euro 1 = BDT 83.6522

Calculation of Exchange Margin:

Total Time = Bill Maturity Period + Transit Period = (60+10) Days = 70 Days Interest = BDT 83.6522*5*70/100*360 = BDT 0.8133

Profit Margin (Per Euro) = BDT 0.1000
Postage Charge = BDT (83.6522*1)/(32*100) = BDT 0.0261
Total Exchange Margin = BDT (0.8133+0.1000+0.0261) = BDT 0.9394

In case of purchase, Local Dealer Bank will realize expenses from the client during calculation of exchange rate for the client. Local dealer bank will provide less amount of BDT to the client in exchange of Euro. That is, during calculation of exchange rate for the client, the amount of total exchange margin has to be deducted from the exchange rate.

So, Euro 1 = BDT (83.6522 – 0.9394) = BDT 82.7182

Therefore, for purchasing of export bill local dealer bank will credit the exporter’s account by BDT (50,000*82.7182) = BDT 41, 35,640.00 (Answer)

Foreign Exchange Math Solution