MZUMBE UNIVERSITY

DAR ES SALAAM CAMPUS COLLEGE

MSc. ACCOUNTING &

GROUP ASSIGNMENT CASE 1-2

LECTURER : DR. ERASMUS F. KIPESHA

SUBJECT : INTERNATIONAL FINANCE

CODE NO. : FN 5212

NAMES OF GROUP MEMBERS REGISTRATION NO:

1.HAFIDHI ABUSHIRI 210150020/T.19

5.BARNABAS M. MISSANA 210150073/T.19

QUESTION ONE.
What does “cross rate” mean?

ANSWER.
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A cross rate is the exchange rate of currency between two currencies when neither of these are
the official currencies of the country in which the quota is given. Foreign exchange traders use
the term to refer to currency quotes that do not include the US dollar irrespective of the country
in which the quote is provided.
The relative value of two currencies is described by comparing the value of each of the two
currencies to a common third currency.
Commonly, it is an exchange rate that can arise when two non-US dollar currencies are
exchanged together.
An example for a simple calculation of the cross rate is given below. This example assumes that
there is only one single cost (i.e. price) between the currencies (in real world, we have two
currency prices: the bid price and the request price. The bid price is when you sell a currency,
and the request price is when you buy a currency):

The spot rate for €/$ is €0.6/$, and the Yen/$ is Dollar. What is the €/Yen cross exchange rate?

€/Yen = (€/$) / (Yen/$) = 0.6 / 89 = 0.00674

QUESTION TWO.
What is the difference between direct quotation and indirect quotation?
ANSWER.
Direct Quotation
Is a quote showing the number of domestic currency units that needed to purchase one unit of
foreign currency.
For example, in the US the quote for the exchange rate indicates the number of dollars required
to buy one unit of a foreign currency i.e. dollars per pound. Is the dollar quoted in a foreign
currency.

WHILE
Indirect Quotation
Is a quote showing the number of foreign currency units that can be bought for one single
domestic currency unit.
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For example. Pound per dollar. It is a dollar-by-dollar foreign currency. An indirect quotation is
the inverse of the respective direct quotation

QUESTION THREE.
Is direct quotation the same as “American terms” or “in $”? Is indirect quotation the same as
“European terms” or “per $”?

ANSWER.
Depending on whose perspective the quotation is given, foreign exchange quotations may be
either direct or indirect.

Direct quotations are the same as American terms where the value of the US dollar is determined
by the unit of a foreign currency measure.

Indirect quotation is the same as European terms which indicate the value of foreign currency as
per unit measure of the US dollar.

QUESTION FOUR.
If a direct quotation is given, how can we find the corresponding indirect quotation? If an
indirect quotation is given, how can we find the corresponding direct quotation?

ANSWER.
Direct quotation
If the quotation is given directly, we can find the corresponding indirect quotation by taking one
division by the quotation directly or the reciprocal quotation.
Of example, if a direct quotation is given: A US investor obtained a direct quotation of 1.3805
US dollars for one Euro, i.e. the price is 1.3805 US dollars. The reciprocal value of the direct
quotation is 1/1.3805 US / Euro, where we get 0.7244 Euros/$ which means one US$ can be
exchanged for 0.7244 Euros.

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Indirect quotation
When the indirect quotation is given, the corresponding direct quotation can be found as a
reciprocal quotation.
For example, if 0.7244Euros / US$ is quoted in US$, we can get a direct quote by taking
1/0.744Euros / US$ where we get 1.3805US$/Euros

QUESTION FIVE.
A currency dealer gave Nick the following rates. He gave Nick the value of £1 in dollars in the
first row, and the value of €1 in dollars in the second row. What are the meanings of these rates
(1.600, 1.620, 1.250, and 1.260)?

American Terms
Bid Ask
Pound 1.600 1.620
Euro 1.250 1.260

ANSWER.
First of all, the exchange rate given is quoted as American Terms, meaning the number of units
of us dollar needed to buy a foreign currency unit. Those levels also mean the following

1.600 This bid price refers to the rate the currency dealer will buy Nick's dollar and give to Nick
Pound.
1.620 This is the price offered by the currency dealer for selling Pound to Nick
1.250 This is the bid price offered to Nick by the currency dealer, which means that Nick has to
sell the dollar by that amount to get one euro from the currency dealer.
1.260This is Ask Rate given by Currency Dealer to Nick where Currency Dealer will use this
rate to buy Euro from Nick.

QUESTION SIX.
Nick wants to find the “European terms” in each row. In other words, he wants to find the value
of $1 in pounds (both bid and ask prices in the first row), and he also wants to find the value of
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$1 in euros (both bid and ask prices in the second row). How can he find these rates? What are
these rates?

American European
Bid Ask Bid Ask
Pound 1.600 1.620 ? ?
Euro 1.250 1.260 ? ?

ANSWER.
The value of $1 per pound (in the first row, both bid and ask prices).

American Terms

Bid Ask

Pound 1.600 1.620

European Terms

Bid Ask

1/Ask 1/Bid

1/1.620 1/1.600

US$ 0.6173 0.625

Therefore,
If Nick sells 1 US$ he will receive 0.6173
Nick will have to pay 0.625 if he buys 1 US$

QUESTION SEVEN.
Nick wants to sell 250,000 pounds. How many euros will he get?

ANSWER.

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Firstly, we have to calculate the cross-rate to get the exchange rate between the Pound and the
Euro.

The computation of cross rate is as follows;

European terms

Bid Ask

Pound/US$ 0.6173 0.625

Euro/US$ 0.7937 0.8

First pair

Pound 0.6173/ USD

Euro 0.8 / US$

Then what is Euro per Pound?

Pound 0.6173 US$ * US$ /Euro 0.8

We'll get the Pound 0.7716 / Euro

Second pair

Pound 0.625 / USD

Euro 0.7937 per US$

Pound 0.625 / US$ * US$ /Euro 0.7937

We are getting Pound 0.7875 / Euro

From the Cross rates we get:

Bid Ask

Pound/ Euro 0.7716 0.7875

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So if Nick wants to sell 250,000 pounds, that's why. How many euros is he going to get?
Pound is the interchangeable (base) currency.
Nick is going to use the Bid rate, but we've got to make Pound the base currency

So we're going to take,

Bid Ask

0.7716 0.7875

1/Ask 1/Bid

1/0.7875 1/0.7716

Euro/Pound 1.2698 1.2960

Thus,

1 Pound= 1.2698 Euros

250,000 Pounds=??? Euros

(250,000pounds*1.698Euros)

Therefore, Nick is going to get 317,460.31 Euros

QUESTION EIGHT.
If his company sells 5 million euros, how many pounds will they get?

ANSWER.
Since, the euro is the exchanged currency (base), thus the cost to be used would be the same.

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Pound 0.7716/ Euro

Therefore;
1 euro = 0.7176 pounds
Euro 5 m =??? Pounds are
(5,000,000euro* 07176pounds)/1euro

Therefore, they are going to get 3,588,800 Pounds

QUESTION NINE.
Nick’s friend Jonathan wants to buy 1 million pounds. How many euros will he pay?

ANSWER
1 euro = 1.2960 pounds
??? Euros = 1 million pounds
(1,000,000pounds*1euro)/1.2960pounds

Thus, Jonathan's going to have to pay EUR 771,604.93

QUESTION TEN.
Jonathan’s firm wants to buy 2 million euros. How many pounds will they pay?

ANSWER.
If, 1 euro = 0.7875 pounds
Then, 2 m of Euro =??? Pounds
(0.7875pounds *2,000,000euro)/1euro

Therefore, Jonathan’s business is going to have to pay 1,575,000 pounds