Currency Euro (EUR/USD) British pound (GBP/USD) Swiss franc (USD/CHF) Japanese y

Question

Currency Euro (EUR/USD) British pound (GBP/USD) Swiss franc (USD/CHF) Japanese yen (USD/JPY) Pakistani rupee (USD/PKR) Spot quote 1.1724 -1.1726 1.3387-1.3389 0.9836-0.9838 09.65-109.67 115.73- 115.83 Part 3. Cross rates a. What are the implied cross bid and ask exchange rates for the Japanese yen and the Pakistani rupee? Which currency would be the base currency in the cross exchange rate b. Wh currency would be the base currency in the cross exchange rate? c. What are the implied cross Which currency would be the base currency in the cross exchange rate? d. How many Swiss francs will a customer that trades Y100 million to this dealer receive? at are the implied cross bid and ask exchange rates for the Euro and the British pound? Which bid and ask exchange rates for the British pound and the Swiss frane?

Explanation / Answer

The following formula can be used to find cross rates in currencies -

(A/B) Bid = (A/C) Bid x (C/B) Bid or (A/B) Bid = 1 / (C/A) Ask x (C/B) Bid. Likewise, the same can be used to ask rate.

The answers are as follows -

a. (JPY/PKR) Bid = (JPY/USD) Bid x (USD/PKR) Bid = 1 / (USD/JPY) Ask x (USD/PKR) Bid

So, (JPY/PKR) Bid = (1 / 109.67) x 115.73 = 1.0553

Similarly, (JPY/PKR) Ask = (JPY/USD) Ask x (USD/PKR) Ask = 1 / (USD/JPY) Bid x (USD/PKR) Ask

So, (JPY/PKR) Ask = (1 / 109.65) x 115.83 = 1.0564

Hence the cross rate for (JPY/PKR) = 1.0553 - 1.0564. The base currency would be Japanese Yen.

b. (EUR/GBP) Bid = (EUR/USD) Bid x (USD/GBP) Bid = (EUR/USD) Bid x 1 / (GBP/USD) Ask

So, (EUR/GBP) = 1.1724 x 1 / 1.3389 = 0.8756

Similarly, (EUR/GBP) Ask = (EUR/USD) Ask x (USD/GBP) Ask = (EUR/USD) Ask x 1 / (GBP/USD) Bid

So, (EUR/GBP) Ask = 1.1726 x 1 / 1.3387 = 0.8759

Hence the cross rate for (EUR/GBP) = 0.8756 - 0.8759. The base currency would be Euro.

c. (GBP/CHF) Bid = (GBP/USD) Bid x (USD/CHF) Bid = 1.3387 x 0.9836 = 1.3167

Similarly, (GBP/CHF) Ask = (GBP/USD) Ask x (USD/CHF) Ask = 1.3389 x 0.9838 = 1.3172

Hence the cross rate for (GBP/CHF) = 1.3167 - 1.3172. The base currency would be British Pound.

d. We will need the Ask rate of (CHF/JPY) is order to do this transaction.

Hence, (CHF/JPY) Ask = (CHF/USD) Ask x (USD/JPY) Ask = 1 / (USD/CHF) Bid x (USD/JPY) Ask

So, (CHF/JPY) Ask = 1 / 0.9836 x 109.67 = 111.4986

Hence, Swiss Franks the customer will receive = ¥ 100 million / 111.4986 = 896,872.25 CHF

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