Reading 18- LOS b (part 2) ～ Q1－8

1.Given a foreign currency quotation bid of $0.8955 and an ask of $0.9045 what is the percentage bid-ask spread, and who profits from it?

A)   0.9950%, customer profits.

B)   1.0050%, bank profits.

C)   0.9950%, bank profits.

D)   1.0050%, customer profits.

The correct answer was C)

% spread = [(ask price – bid price)/ask price] x 100

= [(0.9045 - 0.8955)/0.9045 ] x 100 = 0.9950%

The bid-ask spread is how banks make their profit on foreign currency transactions.

2.The percentage spread between foreign currency quotations is equal to the:

A)   ask price minus the bid price divided by the ask price multiplied by 100.

B)   ask price divided by the bid price.

C)   bid price divided by the ask price multiplied by 100.

D)   ask price minus the bid price divided by the bid price multiplied by 100.

The correct answer was A)

% spread = [(ask price – bid price)/ask price] x 100

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

A)   are a function of transaction volume and volatility.

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

C)   decrease as the size of the transaction decreases.

D)   are always listed with the bid first and the ask second.

The correct answer was C)     

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

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

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

B)   government has recently become more stable.

C)   currency is actively traded.

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

The correct answer was A)

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.

5.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 larger the transaction.

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

The correct answer was A)

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

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

A)   0.0007%.

B)   0.0700%.

C)   8.8840%.

D)   0.0884%.

The correct answer was D)

The bid-ask spread = [(0.7917-.7910)/.7917]*100 = 0.0884%

7.A bank in the U.S. is quoting a bid of 0.9350 USD/CAD and an ask of 0.9400 USD/CAD. For a direct U.S. quote, what is the percentage spread?

A)   0.5319%.

B)   5.5500%.

C)   0.5555%.

D)   0.0053%.

The correct answer was A)

% spread = (ask price – bid price)/ask price x 100

(0.9400 – 0.9350)/0.9400 x 100 =

0.005/0.9400 x 100 = 0.5319 %

8.Because of the uncertainty involved in forward contracts, dealers will quote bid-ask spreads on longer-term forward contracts that are:

A)   narrower.

B)   wider.

C)   longer.

D)   shorter.

The correct answer was B)

The further into the future the quote, the more volatile the price, and the wider the spread.