The Process of Currency Conversion Assignment Example | Topics and Well Written Essays - 1500 words

The Process of Currency Conversion - Assignment Example A spot exchange rate is a rate used in an instant currency conversion agreement between two or more parties. Spot exchange is carried out in a spot exchange market, which is part of the foreign exchange market. On the other hand, the forward exchange rate is the rate agreed on today, to convert currencies at a future date specified in the agreement. Company X, based in Saudi Arabia, plans of purchasing equipment from two suppliers. Considering the location of the sellers, the buyer will have to decide on whether to exchange AED for Euros or the pound. The initial amount set for the purchase is AED 50 million. Both the financial manager and the CEO of Company X plans to take advantage of exchange rate fluctuations and, if the opportunity arises, lowers the cost of the purchase. The equipment is quoted to cost â‚ ¬ 1,090,000 and  £ 860,000 in Euro and pounds respectively. In order to make informed choices, exchange rate movements will be observed for five days from 24th to 28th December. On that note, this assignment presents a five-day exchange rate in a table format showing the value of AED 50 million, for each day, in both the currencies (Pounds and Euros). For each of the five days, the cost of the purchase and the impact of the decision are presented. Last, a report that provides justifications that the decision made is favorable to the company also is provided. For the purpose of purchasing the equipment, the currency used for the transaction is Euros. The equipment has been quoted to cost â‚ ¬ 1,090,000. The table 3 below shows the cost of the equipment in AED based on the exchange rates observations presented in table 1 above. Based on table 3 above, the company will spend AED 4,880,867 when purchasing the equipment within the seven day period when the offer is still valid. When comparing the new cost with the planned initial outlay, the company will spend less than anticipated.