Bid-Ask Cross Rates

Getting confused over this. Anyone can help? Thanks.

PEN:MXN bid = 0.28818 x (1/0.11036) = 2.611

PEN:MXN ask = 0.11001 x (1/0.28918) = 0.380

Given P the direct quotes in U.S. dollars for the Mexican peso (MXN) and the Peruvian nuevo sol (PEN), determine the PEN:MXN bid-ask cross rates. Select the closest correct answer.

MXN:USD Bid/Ask: 0.11001 - 0.11036

PEN:USD Bid/Ask: 0.28818 - 0.28918

_A) PEN:MXN 2.62890 - 2.64630. B) PEN:MXN 2.61127 - 2.62867. C)_PEN:MXN 0.38300 - 0.38554.

Your answer: A was incorrect. The correct answer was B) PEN:MXN 2.61127 - 2.62867.

Need to use the inverse of 0.38 to get the ask, which is 2.62867.

Your bid is correct. not sure why you chose A.

Here is my method for working out these currency questions with bid asks. I find it much easier than stuffing around with the triangles.

STEP 1: work out which of these 2 equations best suits the quote info you are given (ignore the bid ask issue at this stage):

A:B x B:C = A:C

Or

A:B / A:C = C:B

NOTE: you might have to invert some of the quotes to get them to fit one of these equations.

STEP 2:

If you decided that you should solve by multiplying (ie, option 1 above) multiply the two bids together to get the ‘bid’ for the quote you’re trying to solve, and multiply the two asks together to get the ‘ask’.

If you decided that you should solve by dividing (option 2 above), divide the BID of the first quote by the ASK of the second, to get the ‘bid’ for the quote you’re trying to solve. Divide the ASK of the first quote by the BID of the second to get the ‘ask’.

If you forget which ones to use, remember that you’re trying to get the bid ask spread that gives the bank the biggest profit (ie, widest spread). So if you’re multiplying, you should multiply the two smallest numbers (the bids) together to get the bid, and the two largest numbers (the ask) to get the ask.

If you’re dividing, it’s not quite as intuitive but the same logic holds. The bid divided by the larger number (the ask) will give you the smallest solution for the bid, while the ask divided by the smaller number (the bid) will give you the largest solution for the ask.

I was really struggling with these questions until I worked this out. It might not make any sense to anyone else but it works for me. good luck!!

this was known a couple of years ago as “UP the BID, DOWN the AS*”

Up bid/down ask + triangle is how I work it. Thank God for Schweser on that. I was seriously confused before that…

Would you mind sharing the same here please? I dont have schweser material, hence the request. Thank you!

Can you explain the logic for using the inverse of 0.38?

http://www.schweser.com/cfa/cfa2.php

I find it easiest to use fractions to make sure I’m doing the right thing with all the currency questions.

you are given USD/MXN and USD/PEN

you want the answer in MXN/PEN

so first - take the inverse of the first quote to get it in MXN/USD 1/.11001=9.09008 1/.11036=9.06125

(knowing the bid is always lower than the ask so you see that you have to rearrange it 9.06125-9.09008)

then you see that you can just multiply and the USD cancels so you are left with MXN/PEN

bids: 9.06125 MXN/USD *.28818 USD/PEN = 2.61127 MXN/PEN

asks: 9.09008 MXN/USD *.28918 USD/PEN = 2.62867 MXN/PEN

so in your original post you took the inverse of the wrong thing in your ask equation

you have USD/MXN x PEN/USD which gives you PEN/MXN but you want MXN/PEN