Reading 18: Foreign Exchange

LOS a, (Part 1): Define direct and indirect methods of foreign exchange quotations

1.If the bid is $1.8709/GBP and the ask is $1.8841/GBP, what is the bid-ask spread in GBP/USD?

A)   0.5345 - 0.5407.

B)   1.8841 - 1.8709.

C)   0.5345 - 0.0800.

D)   0.5308 - 0.5345.

The correct answer was D)

The bid-ask spread in European terms is foreign currency per dollar (FC/$) so you are being asked to convert the bid-ask spread to GBP/$. To convert to GBP/$ just take the reciprocal of each number and reverse the bid-ask spread.

1/($1.8709/GBP) = 0.5345 GBP/$ and 1/($1.8841/GBP) = 0.53076 GBP/$. The bid-ask spread is now 0.5308 – 0.5345.