Question

a) Use the information below to calculate the bid cross rate between C$ and € in the "C$/€ " format.

	Bid	Ask
Canadian Dollar	$0.7529	$0.7774
Euro	$1.1545	$1.1644

Answer Format: Keep four decimals; use the price currency as the unit. Example:  4.1234(C$) or 4.1234( € )

b) An English business man just received €187,039 payment from a European company. He obtained currency quotes from his bank: €1.116/£ --  €1.1256/£. Estimate his £ cash flow.

Answer format: keep four decimal places; include the price currency only; do not use thousand separator. Example: 2122.1345 (£) or  2122.1345 (€)

c) On May 1 of a certain year the pound to euro exchange rate was £0.1.1245/€. On July 15 the exchange rate was  £0.1.1298/€ . Therefore during the two and half months period, euro appreciated against pound.  

True or False

d) Suppose you obtained quotes for euro from your bank: $1.1265/€ --  $1.1305/€. Calculate the bid ask spread.

Answer format: use four decimals; do not report percentages. Example: 0.0011.

Answer 1

Subpart (a)

Bid(C$/€) = Bid(C$/$) * Bid($/€)

Bid(C$/$) = 1/Ask($/C$)

Bid(C$/€) = (1/0.7774) * 1.1545

= 1.4851

1 Euro equals 1.4851 Canadian Dollar.

Subpart (b)

€1.116/£ --  €1.1256/£

This quotation signifies that the businessman can buy 1 GBP for 1.1256 Euros, and he can sell 1 GBP for 1.116 Euros

The businessman is English, and has received Euros. Thus, he would like to sell Euros, or buy GBPs.

The rate applicable to him would be 1.1256 Euros for 1 GBP.

His GBP Cash flow would be 187,039/1.1256 GBPs

= 166168.2658 GBPs

Subpart (c)

When the GBP to EUR rate increases from £0.1.1245/€ to £0.1.1298/€, it means that the buyer of Euros now has to shell out more GBPs in order to purchase the same amount of Euros. This means that the Euro has strengthened against the GBPs, or Euro has appreciated against Pound.

Thus, given statement is TRUE.

Subpart (d)

$1.1265/€ --  $1.1305/€

The given quote signifies that a customer with the Bank can sell 1 Euro and obtain 1.1265 Dollars. Also, a customer can buy 1 Euro for 1.1305 Dollars.

This means that if the bank successfully buys and sell 1 Euro each, it would receive net 0.004 Dollars (1.1305 - 1.1265)

Thus, the spread here is $0.004/€ or 0.0040