Question

Assume a bank's bid rate for the Danish kroner (DKK) is $0.1875, while its ask rate is $0.1895. Assume you convert $1,000 to Danish kroner to take on your trip to Denmark. Immediately after conversion, a family emergency arises, and you are unable to go on your trip. Thus, you convert the Danish kroner back to dollars.

How many Danish kroner will you receive when converting the dollars initially?

Answer 1

When initially converting the dollars to Danish Kroner you will receive;

DKK 5,333.33

Step-by-step explanation:

The bid price can be defined as the price that buyers are willing to pay for a currency while the ask price is the price that sellers are willing to take for it. In our case;

The bank's bid rate for the Danish Kroner=$0.1875

1 Danish Kroner=$0.1875

This means to convert $1,000 to Danish Kroner, you are selling the Us dollar and buying the Danish Kroner. To buy the Danish Kroner we use the bid rate of $0.1875

Therefor $1,000=(1,000/0.1875)=DKK 5,333.33

But immediately after conversion, you get an emergency that needs your to change your currency back to dollars as follows;

We will utilize the bank's ask rate, for example

1 Danish Kroner=$0.1895

Therefor DKK 5,333.33=(5,333.33×0.1895)=$1,010.67

When initially converting the dollars to Danish Kroner you will receive

DKK 5,333.33