Suppose that Nevada Co., a US-based MNC, makes regular, monthly purchases of materials from a German supplier named Spicurity. These regular payments are typically in the amount of 370,000 euros. Last month the exchange rate was $1.60 per euro. Nevada Co. only has cash reserves in dollars, while Spicurity only has cash reserves in euros. Suppose both companies use the same bank.

In order to conduct this transaction last month, Nevada Co. required $

592,000.00

to pay for the materials. Thus, the bank handling the transaction reduced Nevadas account by this amount, denominated in dollars . The bank then converted this amount to

370,000.00

euros and credited it to Spicuritys account.

Suppose that this month the exchange rate has decreased to $1.53 and that it is time for Nevada Co. to makes its monthly purchase of materials from Spicurity.

In order to conduct this transaction this month, Nevada Co. now requires $ to pay for the materials. Thus, the bank handling the transaction must reduce Nevadas account by this amount, denominated in dollars . The bank must then convert this amount to

euros and credit it to Spicuritys account.

True or False: The bank has acted as a foreign exchange dealer in this transaction.

False

True