Question

2. Suppose the spot quote on the euro is $0.9302-18 and the spot quote on the Swiss franc is $0.6180-90. 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

Bid  $0.9302 /euro

Ask $0.9318 /euro

Mid price = Bid + (Ask - Bid)/2

Mid price = 0.9302 + (0.9318 - 0.9302)/2 = $0.931/euro

Percentage bid-ask spread = (Ask - Bid)/Mid price

Percentage bid-ask spread = (0.9318 - 0.9302)/0.931

Percentage bid-ask spread = (0.0016)/0.931

Percentage bid-ask spread = 0.00171858217

Percentage bid-ask spread = 0.171858217%

Bid $0.6180/Swiss franc

Ask $0.6190/Swiss franc

Mid price = Bid + (Ask - Bid)/2

Mid price = 0.6180 + (0.6190 - 0.6180)/2

Mid price = $0.6185 /franc

Percentage bid-ask spread = (0.6190 - 0.6180)/0.6185

Percentage bid-ask spread = 0.001616814875

Percentage bid-ask spread = 0.1616814875%

The direct spot quote for the franc in Paris.

We need to calculate euro/franc.

Bid  $0.9302 /euro

Ask $0.9318 /euro

Bid $0.6180/Swiss franc

Ask $0.6190/Swiss franc

euro/franc

Bid: $0.6180/Swiss franc/$0.9318 /euro = 0.6180/0.9318 = euro 0.6632324533/franc

Ask: $0.6190/Swiss franc/$0.9302 /euro = 0.6190/0.9302 = euro 0.6654482907/franc