chunty

Which of the following statements about foreign currency bid-ask spreads is least accurate? Foreign currency bid-ask spreads:

A) are not directly affected by bank and currency dealer positions.

B) decrease as the size of the transaction decreases.

C) are a function of transaction volume and volatility.

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Bid-ask spreads are size related in that the smaller the transaction the larger the spread.

chunty

Which of the following will cause a currency's bid-ask spread to widen? The:

A) government has recently become more stable.

B) bid-ask spread is for a small transaction rather than a large one.

C) bid-ask spread is a spot quote rather than a forward quote.

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The bid is the price at which the bank will buy foreign currency, and the ask is the price at which the bank will sell foreign currency. The more actively a currency is traded, the narrower the spread. Forward spreads are wider than spot spreads. The smaller the transaction size, the wider the spread. The greater the exchange-rate volatility, the greater the bid-ask spread.

chunty

A bid-ask spread on a foreign currency will be narrower the:

A) more actively traded the currency and the larger the transaction.

B) more actively traded the currency and the smaller the transaction.

C) less actively traded the currency and the smaller the transaction.

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The more actively a currency is traded, and the larger the transaction, the narrower the spread.

chunty

Suppose the spot CHF:USD exchange rate quotation is 0.7910 - 0.7917. The percentage bid-ask spread on the USD is:

A) 0.0884%.

B) 0.0007%.

C) 8.8840%.

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The bid-ask spread = [(0.7917 − 0.7910) / 0.7917] × 100 = 0.0884%

chunty

Given an exchange rate of CAD:USD 0.9250 and CHF:USD 1.6250, what is the exchange rate quoted in CHF:CAD?

A) 0.5692.

B) 1.5032.

C) 1.7568.

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(CHF:USD 1.6250) / (CAD:USD 0.9250) = CHF:CAD 1.7568

chunty

Given P the direct quotes in U.S. dollars for the Mexican peso (MXN) and the Peruvian nuevo sol (PEN), determine the PEN:MXN bid-ask cross rates. Select the closest correct answer.

MXN:USD Bid/Ask: 0.11001 - 0.11036
PEN:USD Bid/Ask: 0.28818 - 0.28918

A) PEN:MXN 2.62890 - 2.64630.

B) PEN:MXN 0.38300 - 0.38554.

C) PEN:MXN 2.61127 - 2.62867.

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This problem demonstrates the "Bid-Ask Matrix Method" to calculate the bid and ask quotes:
Step 1: Put the bid-ask quotes into a matrix. Use direct quotes in the common currency.

Currency	Bid	Ask
MXN	0.11001	0.11036
PEN	0.28818	0.28918

Step 2: "Divide Out" the diagonals and take the reciprocal. Remember that the quotes are direct quotes for a USD investor.
(Remember to put MXN in the numerator - because MXN is in the numerator of the quote we are asked to calculate.)

MXNBid / PENAsk = 0.11001 / 0.28918 = MXNEN 0.38042,
1 / MXNEN 0.38042 = PEN:MXN 2.62867
MXNAsk / PENBid = 0.11036 / 0.28818 = PEN:MXN 0.38296,
1 / MXNEN 0.38296 = PEN:MXN 2.61127

Step 3: Quote : The PEN:MXN Bid-Ask is:
(Note: The lower number from Step 2 is the bid, the higher number is the ask.)

PEN:MXN 2.61127 to 2.62867

chunty

Given the following quotes, USD:GBP 2.0000 and USD:MXN 8.0000, calculate the direct GBP:MXN spot cross exchange rate.

A) 4.0000.

B) 0.6250.

C) 0.2500.

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If we had 1 GBP we could buy 0.50 USD. That 0.50 USD would buy 4 Pesos. Alternately, you can invert the first quote to read GBP:USD 0.5000. Then, 0.5000GBP:USD × 8.0000USD:MXN = 4.0000GBP:MXN.

chunty

A bank in Canada is quoting USD:CAD bid 1.4950 − ask 1.5005, and EUR:USD bid 0.9350 − ask 0.9400. What is exchange rate bid and ask for EUR:CAD?

A) EUR:CAD 1.5904 − 1.6048.

B) EUR:CAD 1.3978 − 1.4105.

C) EUR:CAD 0.6254 − 0.6264.

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First invert the EUR:USD quote by 1 / 0.9350 = 1.0695 and 1 / 0.9400 = 1.0638 for a quote of USD:EUR 1.0638 − 1.069. Then set up a bid-ask matrix.
1.4950 / 1.0695 = EUR:CAD 1.3978
1.5005 / 1.0638 = EUR:CAD 1.4105
The EUR:CAD bid-ask quote is 1.3978 − 1.4105

chunty

Given the following quotes for the Canadian dollar (CAD) and the British pound (GBP), determine the GBP:CAD bid-ask spread. (Note: Carry calculations to at least five decimal places)

USD:CAD 1.59031 − 1.59701
USD:GBP 0.69459 − 0.69686

A) GBP:CAD 2.29921 − 2.31631.

B) GBP:CAD 2.28211 − 2.29921.

C) GBP:CAD 2.28957 − 3.28863.

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We recommend using the following "Bid-Ask Matrix Method" to calculate the bid and ask quotes:Step 1: Put the bid-ask quotes into a matrix as below:

Currency	Bid	Ask
USD:CAD	1.59031	1.59701
USD:GBP	0.69459	0.69686

Step 2: “Divide Out” the diagonals.(Remember to put CAD in the numerator - because CAD is in the numerator of the quote we are asked to calculate.)
CADBid / GBPAsk = 1.59031 / 0.69686 = GBP:CAD 2.28211
CADAsk / GBPBid = 1.59701 / 0.69459 = GBP:CAD 2.29921

chunty

An analyst observes that the exchange rate for Mexican pesos is USD:MXN 8.0000, and the exchange rate for Polish zlotys is USDLN 6.0000. The PLN:MXN exchange rate is closest to:

A) 1.3333.

B) 0.7500.

C) 14.0000.

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The cross rate of PLN:MXN is (USD:MXN 8) / (USDLN 6) = 1.3333 PLN:MXN.