Purchase Solution

# Bid and ask cross rates, outright cross rates

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8. As a foreign exchange trader at Sumitomo Bank, one of your customers would like a yen quote on Australian dollars. Current market rates are:

Spot 30-day

¥101.37-85/U.S.\$1 15-13

A\$1.2924-44/U.S.\$1 20-26

a. What bid and ask yen cross rates would you quote on spot Australian dollars?

b. What outright yen cross rates would you quote on 30-day forward Australian dollars?

c. What is the forward premium or discount on buying 30-day Australian dollars against yen delivery?

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a. What bid and ask yen cross rates would you quote on spot Australian dollars?

ANSWER. By means of triangular arbitrage, we can calculate the market quotes for the Australian dollar in terms of yen as

¥78.31-81/A\$1

These prices can be found as follows. For the yen bid price for the Australian dollar, we need to first sell Australian dollars for U.S. dollars and then sell the U.S. dollars for yen. It costs A\$1.2944 to buy U.S.\$1. With U.S.\$1 we can buy ¥101.37. Hence, A\$1.2944 = ¥101.37, or A\$1 = ¥78.31. This is the yen bid price for the Australian dollar.

The yen ask price for the Australian dollar can be found by first selling yen for U.S. dollars and then using the .S. dollars to buy Australian dollars. Given the quotes above, it costs ¥101.85 to buy ...

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