Question

1. Suppose the spot quote on the euro is $0.9302-12 and the spot quote on the Swiss franc is $0.6180-88. Compute the percentage bid-ask spreads on the euro and the franc, then calculate the direct spot quote for the franc in Paris.

Answer 1

Calculation of Percentage bid ask spread

The percentage bid-ask spreads on the euro and franc are calculated as follows: Euro bid-ask spread = (0.9312 - 0.9302)/0.9312 = 0.11%

SFr bid-ask spread = (0.6188 - 0.6180)/0.6188 = 0.13%

To sell one franc for euros, first sell the franc for $0.6180 and then convert $0.6180 into euros

at the ask rate of $0.9312. Thus the bid rate for the franc is 0.6180/0.9312 = €0.6637. Similarly, to acquire

one franc, sell euros for dollars and then sell dollars for francs. Specifically, it costs $0.6188 to buy €1.

Because €1 can be converted into $0.9302, it takes €0.6188/0.9302 = €0.6652 to buy $0.6188. Thus the

ask rate for francs is €0.6652. The bid-ask quote on the franc in paris is therefore €0.6637-52.