Reading 18- LOS e ～ Q1－5 contract, currency, foreign, forward, direct

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1. the liquidity on a foreign currency forward contract decreases, the direct quote:

A)   spread will narrow and the indirect quote spread will widen.

B)   spread will widen and the indirect quote spread will narrow.

C)   and the indirect quote spreads will widen.

D)   and the indirect quote spreads will narrow.

2. an attempt to reduce her inventory, a dealer holding excess foreign currency should:

A)   move the midpoint of her direct quote down.

B)   quote a wider bid-ask spread.

C)   quote a narrower bid-ask spread.

D)   move the midpoint of her direct quote up.

3. American wants to buy six cases of champagne. Each case costs 390 SEK. If the SEK/USD exchange rate is 6.90, what is the USD cost of the champagne?

A)   USD339.13.

B)   USD2,340.00.

C)   USD56.52.

D)   USD241.50.

4．hich of the following statements best describes a six month forward foreign currency spread? The six month forward foreign currency spread:

A)   tends to be smaller than the spot spread.

B)   is the same as the spot spread.

C)   is equal to: (spot spread × (1 + 1/6)).

D)   tends to be larger than the spot spread.

5．sume that the USD/GBP six-month forward rate is quoted at a bid of 1.72546 and an ask of 1.72776. What is the spread on the indirect quote for a U.S. dealer?

A)   0.000772 USD/GBP.

B)   0.000772 GBP/USD.

C)   0.002300 USD/GBP.

D)   0.002300 GBP/USD.

 

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1. the liquidity on a foreign currency forward contract decreases, the direct quote:

A)   spread will narrow and the indirect quote spread will widen.

B)   spread will widen and the indirect quote spread will narrow.

C)   and the indirect quote spreads will widen.

D)   and the indirect quote spreads will narrow.

The correct answer was C)

Both the direct quote and the indirect quote spreads will widen as the liquidity on a foreign currency forward decreases.

2. an attempt to reduce her inventory, a dealer holding excess foreign currency should:

A)   move the midpoint of her direct quote down.

B)   quote a wider bid-ask spread.

C)   quote a narrower bid-ask spread.

D)   move the midpoint of her direct quote up.

The correct answer was A)

To reduce inventory, a dealer holding excess foreign currency should move the midpoint of her direct quote down. If the dealer widens the bid-ask spread it will likely take her out of the market because there will be few or no traders willing to transact with her. Similarly, with a narrower spread, her bid price would rise at a time when she does not want to buy.

3. American wants to buy six cases of champagne. Each case costs 390 SEK. If the SEK/USD exchange rate is 6.90, what is the USD cost of the champagne?

A)   USD339.13.

B)   USD2,340.00.

C)   USD56.52.

D)   USD241.50.

The correct answer was A)

Total SEK cost = 390 × 6 = 2,340 SEK. Invert the quote = 1 / 6.9 = 0.1449 USD/SEK.
Total dollar cost = 0.1449 USD/SEK × 2,340 SEK = USD339.13

4．hich of the following statements best describes a six month forward foreign currency spread? The six month forward foreign currency spread:

A)   tends to be smaller than the spot spread.

B)   is the same as the spot spread.

C)   is equal to: (spot spread × (1 + 1/6)).

D)   tends to be larger than the spot spread.

The correct answer was D)

The forward foreign currency spreads tend to be larger than the spot spreads.

5．sume that the USD/GBP six-month forward rate is quoted at a bid of 1.72546 and an ask of 1.72776. What is the spread on the indirect quote for a U.S. dealer?

A)   0.000772 USD/GBP.

B)   0.000772 GBP/USD.

C)   0.002300 USD/GBP.

D)   0.002300 GBP/USD.

The correct answer was B)

For an indirect quote, the bid and ask prices must be converted to GBP/USD. This is accomplished by taking the reciprocal of each and then subtracting the bid from the ask price.
1/1.72546 USD/GBP = 0.579556 GBP/USD
1/1.72776 USD/GBP = 0.578784 GBP/USD
The spread is 0.578784 – 0.579556 = 0.000772 GBP/USD