This is doing my head in: EUR:USD 0.9959- 0.9960 Right so this means you can buy 1 USD for €0.9960 and Sell 1 USD for €0.9959. So if you have 1 euro and want to buy dollars you would get $0.9960. On the flip side if you have $0.9959 and want EUROs you would divide by 0.9959 and get 1 Euro. Right? Now in a question involving a US investor investing in a European company how does it all work? Let’s say at the beginning of the investment the price was €40 and it paid a div of €0.5 and you bought 1000 shares. When you come to sell it the FX rate is: EUR:USD 0.9965- 0.9968 Which rates do you use and most importantly why, for calculating USD returns? Thanks
Sell dollars and buy 40000 Euros at 0.9960 $ per Euro = 39,840 Dividends = 0.5 \* 1000 = 500 Euros Price Appreciation of stock = 0 Net = 4000+500 = 40500 Euros Sell the stock and realize 40500 Euros total. Buy Dollars at 0.9968 per Euro 40500/0.9968 = 40630 Gain = 40630/39840 -1 = 1.98%
Janakisri: converting back to dolars would use the bid in the EUR:USD quotes (.9965) so the final return would be 40500 * .9965 = 40358 and the total gain would be 40358/39840 - 1 = 1.3% return This is a tricky Q b/c they don’t start with a $ amount so you need to work backward first to find the original investment from the investor, then work forward to find the end result. The rule that I use is if you posses the Base currency(first currency, ie EUR is EUR:USD) then multiply by the bid, if you posses the second currency then divide by the ask. Using that logic Mambovipi, if you have 1 EUR you can buy 1*.9959 dollars, or if you have 1 USD then you can exchange for 1/.9960 EUR
Well i always use this concept in my head for FX quotes. Pay more get less (i.e. the investor always loses 
) so if the quote is EUR:USD 0.9959- 0.9960 it means pay more (.9960$ to get a Euro) and get less (pay a euro and get only USD 0.9959). Have this in your head all the time and you will do well in any FX problem.