Question

2. You are planning a trip to Europe and Japan and want to change U.S. dollars into euros and yen. Your bank provides the following quotes:

Currency	Bid	Ask
Euros	$1.194	$1.245
Yen	$0.009245	$0.00967

(a) What are the bank's relative bid/ask spreads for the two currencies?

(b) How much would you lose if you converted $500 into euros and $500 into yen respectively, and then back into dollars?

(c) If you need to convert €1,000 Euros into Japanese Yen, how much Yen will you get based on the quotes in the table?

Answer 1

a) Spread = Ask Price - Bid Price

Spread for Euro = 1.245 - 1.194 = $0.051

Spread for Yen = 0.00967 - 0.009245 = $0.000425

b) It is given that

($/Euro)_Bid: 1.194 and ($/Euro)_ask :1.245

To convert $500 into Euro, we divide 500 by ask price

500 / 1.245 = 401.61 Euro

Then to convert 401.61 Euro into $ , we multiply 401.61 by bid price

401.61 x 1.194 = $ 479.52

Loss = 500 - 479.52 = $20.48

It is given that

($/Yen)_Bid : 0.009245 and ($/Yen)_ask 0.00967

To convert $500 into yen , we divide 500 by ask price

500 / 0.00967 = 51706.31 Yen

To convert 51706.31 Yen to $, we multiply 51706.31 by bid price

51706.31 x 0.009245 = $478.02

Loss = 500 -478.02 = $21.98

c) To convert Euro to Yen, we need to find Euro / Yen cross rate

(Euro/Yen)_ask = (Euro/$)_ask x ($/Yen)_ask

(Euro/$)_ask = 1 / ($/Euro)_bid = 1 / 1.194

(Euro/Yen)_ask = (1/1.194) x (0.00967) = 0.00967 / 1.194 = 0.008099

To convert 1000 Euro to Yen , we divide 1000 by Euro/Yen ask rate

1000 / 0.008099 = Yen 123472.03