Explore BrainMass

bid-ask spreads for each currency

A: What are the bid-ask spreads for each currency India and Brazil (include calculations)

b: What are the implications of the presence or absence of a forward exchange market?

Solution Preview

The foreign exchange market is an over the counter market where foreign currencies are bought and sold against one another. There are two types of exchange rate quotations- direct and indirect. In India, the central bank RBI has appointed banks to act as market makers. They are called authorized dealers. A market maker is a person who quotes two process for a commodity - BID rate and ASK rate. For example, bank A quote,

Rs. /R = 57.90/58.20.

The above quote implies that bank A is bidding for Real at Rs. 57.90 and is asking Rs. 58.20 to sell one real. The difference, I.e. Rs. 0.30 per Real is known as the bid- ask spread. It goes towards:

1. Covering the expenses of the bank in the dealing business.

2. Risk premium.

3. Normal profit.

Suppose there is bank B in Brazil, the equivalent quote is calculated as under:

R/ Rs. = (1/58.20)/ (1/57.90) = 0.01718/ 0.01727

The above quote implies that bank B is bidding ...

Solution Summary

The bid-ask spreads for each currency in India and Brazil are found. The implications presence or absence in the forward exchage market is discussed. 580 words with calculations