Module: | MODULE A: INTERNATIONAL BANKING
Q8: A manufacturing firm in Pune, India, needs to urgently remit 1,00,000 Euros to a machinery supplier in Germany. The local Indian Authorized Dealer bank does not have a direct market quote for the Euro against the Indian Rupee. However, the bank has access to the following two-way quotes in the market. US Dollar to Indian Rupee is 83.00 Bid and 83.10 Ask. Euro to US Dollar is
1.0800 Bid and 1.0820 Ask. Calculate the exact total outflow in Indian Rupees for the manufacturing firm to purchase the required 1,00,000 Euros.
✅ Correct Answer: C
🎯 Quick Answer:
The total Rupee outflow for the importer will be 89,91,420 Indian Rupees.This resulting rate is called a Cross Rate.
Structural Breakdown: 1. Identify the requirement.
The Indian importer needs to buy 1,00,000 Euros.
Therefore, the Indian bank must sell Euros to the customer.
2. Determine the chain of transactions.
Since the bank does not have Euros, it must first buy Euros from the international market using US Dollars, and then buy those US Dollars using Indian Rupees from the local market.
3. Select the rates using the Sell High principle.
To sell Euros to the customer, the bank will charge the highest possible sequence of Ask rates.
The bank buys Euros using US Dollars at the Euro to US Dollar Ask rate of 1.0820.
This means 1 Euro costs 1.0820 US Dollars.
The bank buys US Dollars using Indian Rupees at the US Dollar to Indian Rupee Ask rate of 83.10.
This means 1 US Dollar costs 83.10 Indian Rupees.
4. Calculate the Cross Rate.
Multiplying the two Ask rates gives the final Ask rate for Euro to Indian Rupee.
Cross Rate equals 1.0820 multiplied by 83.10 equals 89.9142.
This means 1 Euro costs 89.9142 Indian Rupees.
5. Final Calculation is 1,00,000 Euros multiplied by 89.9142 equals an exact outflow of 89,91,420 Indian Rupees.
This is read as Eighty-Nine Lakhs, Ninety-One Thousand, Four Hundred and Twenty Rupees.