bid: 0.7140/$ ask: 0.7390/$ 1.) If the MNC wants to sell $200 million, how much

Question

bid: 0.7140/$

ask: 0.7390/$

1.) If the MNC wants to sell $200 million, how much will it receive in pounds?

2.) If the MNC wants to buy 50 million, how much will it pay in dollars?

3.) Using the convention currency traders use to quote spreads, calculate the bid/ask spread on the dollar as a percentage rate up to four decimal places.

4.) How would a New York branch of the London bank post the above bid/ask prices? Calculate the bid/ask spread on the pound as a percentage rate up to 4 decimal places.

Explanation / Answer

Here the exchange rate is given as /$. That is is the price and $ is the product.

1.) If the MNC wants to sell $200 million, how much will it receive in pounds?

MNC wants to sell $, which is the product in the exchange rate. So bank need to buy $. Therefore, BID RATE (0.7140/$) is relevant.

1$ = 0.7140

$200 million = 0.7140 * 200 million

Receipt in pounds = 142.80 million

2.) If the MNC wants to buy 50 million, how much will it pay in dollars?

MNC want to buy , which is the price in the exchange rate. So bank need to sell ,buy $. Therefore, BID RATE (0.7140/$) is relevant.

1 = $1/0.7140

50 million = $1/0.7140 * 50 million

pay in dollars = 70.03 million

3.) Using the convention currency traders use to quote spreads, calculate the bid/ask spread on the dollar as a percentage rate up to four decimal places.

bid/ask spread as a percentage = (Ask - Bid) / Ask

= (.7390-.7140) / .7390

= .0250/.7390

= .033829

= 3.3829%

4.) How would a New York branch of the London bank post the above bid/ask prices? Calculate the bid/ask spread on the pound as a percentage rate up to 4 decimal places.

In london market, the exchange rates are quoted as indirect quote. That is in foreign currency/home currency format. Here $/. We also know that Bid(A/B)=1/ask(B/A) and vice-versa.

Bid($/)=1/ask(/S)

= 1/.7390

Bid($/) = 1.3532

Ask($/)=1/bid(/S)

= 1/.7140

Ask($/)= 1.4006

bid/ask spread as a percentage = (Ask - Bid) / Ask

=(1.4006-1.3532)/1.4006

= .0474/1.4006

=.033843

= 3.3843%

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