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.

Answer 1

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%