Question

Assume USD 1 is worth 74.315 Argentine Peso (ARS), and USD 1 is also worth 771.40 Chilean Peso (CLP). What is the definition of the cross rate ARSCLP? (4 points) How much is the cross rate ARSCLP? (3 points)

2. () Bid-Ask Spread. You and your sister, Jane, plan to participate in the “Study Abroad” program this winter. You plan to go to Frankfurt, Germany and Jane will visit Tokyo, Japan. Both of you need to transfer your USD to the respective foreign currency right now. Here is the market data: EURUSD spot rate: the big figure is 1.19; market quotes are: 92/95. USDJPY spot rate: the big figure is 106; market quotes are: 65/68. a. What is the exchange rate that you will use to buy EUR?

(3 points) What is your bid-ask spread in percentage?

(3 points) b. What is the exchange rate that Jane will use to buy JPY?

(3 points) What is her bid-ask spread in percentage?

(3 points) c. What are the EURJPY cross-exchange bid and ask rates, assuming there is no transaction cost, and the liquidity is very similar? (make sure you use the correct bid or ask rate)

() What is the bid-ask spread in percentage for EURJPY? (3 points)

Answer 1

a) An Euro can be bought with $ 1.1995 as its ask rate in forex market.

bid ask spread in percentage

Bid Ask spread % = {(Ask price - Bid Price) / Ask Price } *100 = { (1.1995 -1.1992)/1.1995} *100

Bid Ask spread % = (0.0003 / 1.1995)*100 = 0.025%

b) Jane will use JPY 106.65 a

As the given quote has base currency $ ,

To have JPY we need to see the transaction as we are going to sell/convert $

So a dollar can be converted in JPY at 106.65 as it is a bid rate (ie if jane have dollars and want JPY with this dollars, every unit of $ will give her JPY 106.65)

.

Bid Ask spread % = {(Ask price - Bid Price) / Ask Price } *100 = { (106.68 - 106.65) / 106.68 } *100

Bid Ask spread % = (0.03 / 106.68)*100 = 0.028%

C) Calculation of cross rate

Note:

- Think as a layman,

- You have to quote EURJPY means how much JPY you have to pay for a unit of EUR ( to buy an EURO ) ie Ask rate over the counter.

- and when you sell An EURO or convert an Euro in JPY how much JPY you will have for a unit of EURO. ie Bid rate.

• EUR/JPY (ASK RATE)

= 1.1995 × 106.65

= JPY 127.9267

It means you can buy a Euro with JPY 127.9267

As i stated in note you have to see EURO as base currency ie interpret a UNIT OF EURO .Cross rate (ASK) means you have an EURO now how much dollars you can have with this a unit of EURO the answer is $1.1995 now you have these $ 1.1995 , how much JPY you can have with this ...the answer is 1.1995 × 106.65 = JPY 127.9267. This is the cross rate.

• EUR/JPY (BID RATE)

= 1.1992 × 106.65

= JPY 127.8947

It means if you want to convert a unit of EURO in JPY you will get JPY 127.9307.

i stated in note you have to see EURO as base currency ie interpret a UNIT OF EURO in terms of JPY.

For BID rate you have to think in reverse from above ask cross rate Calculation ie you have a EURO and convert it in $ , now you have $ 1.1992 (as per EURUSD quote) now you sell/ convert these 1.1992 dollar to get JPY ....how much JPY you can have with these $ (selling $ with USDJPY quote) the answer is $1.1992 * JPY 106.65 = 127.8947.

CROSS RATE = 127.8947/127.9267

ie JPY for An EURO

Bid Ask spread % = {(Ask price - Bid Price) / Ask Price } *100

= { (127.9267 - 127.8947) / 127.9267 } *100

Bid Ask spread % = (0.032 / 127.9267 )*100 = 0.025%

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