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.
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!!