INBU 4200
WORKSHEET #4ANSWER KEY
UNDERSTANDING COMPLETE FOREIGN EXCHANGE QUOTES
As we noted in class, a complete foreign exchange quote from a market maker consists of:
(1) an ISO designated base currency and an ISO designated quote currency
(2) a bid price and an ask price
Below are a series of questions involving foreign exchange quotes. They are designed to test your understanding of a complete FX quote.
1. You see on the FX Street Web site the following market maker quote for the euro:
EUR/USD 1.1877/1.1880 (Note: Quote in American terms)
If you wanted to purchase 1 euro from this market maker, how much would you pay in dollars? $1.1800
If you wanted to sell 1 euro to this market maker, how much would you get in dollars?$1.1877
If you wanted to buy 1 U.S. dollar from this market maker bank, how much would you pay in euros? (Hint: you need to convert the above exchange rates to European terms for this). 1/$1.1877 = .8419 Euros
2. You are Starbucks Japan, and you want to convert your Japanese yen profits into U.S. dollars for use back in the United States. Your market maker bank quotes you the following rate:
USD/JPY 117.99/118.04 (Note: Quote in European terms)
If you do convert yen into dollars at this rate, how many yen will you need to exchange for each U.S. dollar?118.04
3. You are a U.S. importer and have purchased goods from an Australian manufacturer. The Australian manufacturer is requiring that you pay for these goods in Australian dollars. You received the following quote from your market maker bank:
AUD/USD .7380/.7384 (Note: Quote in American terms)
If you do purchase Australian dollars from this market maker bank, how much will you pay for each Australian dollar in U.S. dollars?$.7384
4. You are considering going to Mexico this spring break. You notice that according to FX Street, the market maker quote for the Mexican Peso is:
USD/MXN 10.5035/10.5085 (Note: Quote in European terms)
If you convert U.S. dollars into Mexican pesos at the above rate, how many peso will you receive for each U.S. dollar?10.5035
At the end of your trip, you return home with both a tan and a lot of peso. If you were to convert these into U.S. dollars upon your return, at the rate above, how many U.S. cents will you receive for each peso you are converting? (Recall the hint from question 1).1/10.5085 = $0.09516
5. You are a large global company and you deal with many global banks acting as market makers. Three in particular have provided you with the following British pound quotes:
Bank A: GBP/USD 1.7353/1.7358 (Note: all quotes in American terms)
Bank B: GBP/USD 1.7351/1.7360
Bank C: GBP/USD 1.7352/1.7357
Assuming you want to buy British pounds, which bank should you deal with?
Bank C at $1.7357
Assuming you want to sell British pounds, which bank should you deal with?
Bank A at $1.7353
6. You are a currency trader and have decided to buy New Zealand dollars. You receive the following market maker quote:
NZD/USD .6693/.6700 (Note: Quote in American terms)
If you buy from this market maker, what price will you pay in U.S. dollars?
.6700
If you reverse your transaction at the above quotes, how much will you lose (in U.S. dollars) on each New Zealand dollar which you traded?
.6693 - .6700 = -.0007