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# 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?

#### Solution Preview

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 ...

#### Solution Summary

This posting gives detailed answers to the questions regarding Bid and ask cross rates, outright cross rates, forward premium/discounts.

\$2.19

## What is the SFr/\$ exchange rate? Is there a profitable arbitrage situation? Describe it. What bid and ask yen cross rates would you quote on spot Australian dollars? What outright yen cross rates would you quote on thirty-day forward Australian dollars? What is the forward premium or discount on buying thirty-day Australian dollars against yen delivery? What was the dollar value of the yen in 1995? What was the yen's dollar value in 2000? By what percent has the yen fallen in value between 1995 and 2000?

1. The \$/? exchange rate is ?1 = \$0.95, and the ?/SFr exchange rate is SFr 1 = ?0.71. What is the SFr/\$ exchange rate?

2. Suppose the direct quote for sterling in New York is 1.1110 -5.
a. How much would £500,000 cost in New York?
b. What is the direct quote for dollars in London?

3. Suppose the euro is quoted at 0.6064- 80 in London and the pound sterling is quoted at 1.6244- 59 in Frankfurt.
a. Is there a profitable arbitrage situation? Describe it.

4. As a foreign exchange trader at Sumitomo Bank, one of your customers would like spot and thirty-day forward yen quotes 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 thirty-day forward Australian dollars?
c. What is the forward premium or discount on buying thirty-day Australian dollars against yen delivery?

4. In 1995, one dollar bought ¥80. In 2000, it bought about ¥110.
a. What was the dollar value of the yen in 1995? What was the yen's dollar value in 2000?
b. By what percent has the yen fallen in value between 1995 and 2000?
c. By what percent has the dollar risen in value between 1995 and 2000?

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