The following are FX quotes from two competition banks. Determine at which rate and whom the client will deal at.

Fill the blanks:

	Client wants to	Bank A quote	Bank B quote	Client deals at
	Buy 5 GBP versus USD	1.3050/58	1.3052/62	1.3058 Bank A
A	Sell 10 USD versus JPY	110.33/43	110.35/42
B	Buy 1 USD versus CAD	1.3156/64	1.3153/61
c	Buy 5 USD versus EUR	1.0912/19	1.0910/20

Assume you are now a price maker (market maker). Quote a two-way price (both bid and offer with a maximum of 10 points/pips spread) that would attract the client

d. of deal no. a above to deal with your bank.

e. of deal no. b above to deal with your bank

Can anyone help me solve a-e?

Expert Solution

A) For selling 10 USD against JPY, client will go to Bank A as the Offer price is better than Bank B ie 110.43. Thereby, client will receive 1103.3 JPY by selling 10 USD.

B) For buying 1 USD against CAD, client will go to bank B as the Bid rate is lower than bank A ie 1.3153. Thereby, client will pay 1.3153 CAD to buy of 1 USD

C) For buying 5 USD against EUR, client will go to bank A as the Offer rate is lower than bank B ie 1.0919. Thereby, client will pay 4.58 Eur to buy 5 USD.

D) In deal no. a, client wants to sell USD against JPY. hence he would be attraced to the bank which gives a better offer rate. In the abve example Bank B gave an offer rate of 110.43. Any rate above this would be attractive for the client. Also, keeping the spread of 10 points the effective rate would be - 110.34 /110.44. By this the client would receive 1103.4 JPY.

E) In deal no b, the client wants to buy USD against CAD. Hence he would be attracted to the bank which gives low bid rate. In the above example Bank A gave a bid rate of 1.3153. Any rate lesser than this would be attractive for the client. Also, keeping the spread of 10 points the effective rate would be - 1.3152 / 1.3162. By this the client would have to pay 1.3152 CAD.

jeff jeffy answered 2 years ago

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