Q:Today’s spot NCD:USD ask exchange rate is .6010 and the bid is 0.60000. What is the percentage spread on the USD? Trying to figure out when to use the bid or ask in the denominator. What are they getting at when they say “on the USD”?
I had to explain this type of problem in my study group yesterday. The book provides a great way to simplify all the cross rate problems in 2 steps: 1) Determine your common currency then form the problem so that it eliminates it Example: USD:Sfr = 2-3 USD:¥ = 100-150 Solve for SFr:¥ Solution: USD is the common currency We want Sfr in the numerator and ¥ in the denominator So, (USD:¥)/(USD:SFr) = (SFr/USD) * (USD/¥) = SFr/¥ 2) Remember your Bid is the smallest possible number (and your ask is the largest possible number. Lets solve for the bid: To get the smallest value, we need to have the smaller number in the numerator and the larger in the denominator. Remember: ¥ is ultimately our denominator. Don’t get confused! Formula: (USD:¥)/(USD:SFr) - NOTE: We discovered this in step 1 SFr:¥ (bid) = (USD:¥)/(USD:Sfr) = 100/3 = 33.33 Try working through the problem for the ask. Remember, the ask is the largest possible value. Hope that helps clarify!
From my readings, you always use the ask to determine % spread. It doesn’t matter if you convert NCD:USD to USD:NCD. The % spread will remain the same. The ask is always the denominator. Your answer is .166%.
Let me see if I can simply… USD: Sfr 2 - 3 USD: Yen 100 - 150 solving for bid-ask Sfr:Yen 1.) remember, since we have a common quoted currency (USD) we can use the formula: a:b / a:c = c:b (remember the " : " sign can be converted to a divide sign when the letters are switched…i.e. c:b = b/c (this is important for ease in remembering your ask and bid denominators…we’ll use this later) 2.)…since we want c:b to be Sfr: Yen… we want “c” to be Sfr , and “b” to be Yen so substituting these into the above formula we have… a: b / a: c = c:b USD:Yen / USD:Sfr = Sfr:Yen 3.)now, remember from above…c:b = b/c… so, when we want Sfr:Yen bid…(c:b = b/c)…we want USD:Yen bid USD:b --------------- … -------- USD:Sfr ask USD:c and when we want Sfr: Yen ask (c:b = b/c)…we want USD: Yen ask ------------------ USD: Sfr bid if we think of the USDs as cancelling out… Sfr: Yen bid = Yen bid/Sfr ask 100/3 = 33.3 Sfr: Yen ask = Yen ask/Sfr bid 150/2 = 75 for…Sfr:Yen bid-ask = 33.3 - 75 This “simplifies” it for me, if you can call it that. Though it’s different when the original problem is two different types of quotes, i.e. Sfr:USD USD: Yen (the "quoted currency is not common) then you have to use a:b X b:c = a:c and that’s a story for another post.
OOps, ran out of time to finish editing my post so it looks confusing! 3.) c:b = b/c… Sfr:Yen ask = USD:Yen ask/USD:Sfr bid Sfr:Yen bid = USD:Yen bid/USD:Sfr ask cancelling out USD to make easier to remember… Sfr:Yen ask = Yen ask/Sfr bid Sfr:Yen bid = Yen bid/Sfr ask Sfr:Yen bid = 100/3 = 33.3 Sfr:Yen ask = 150/2 = 75 One more thing…it helps to physically write out the numerator OVER the denominator ( in the formulas in #3), versus all on one line like this:…xxxx/yyyy. It make is easier to see the “pattern”. I just couldn’t type so that it would post like that.
Pgiger, i like your method. Its lot easier than CFAI text. But i have confusion over your notations. "Solve for SFr:¥ “We want Sfr in the numerator and ¥ in the denominator” I read as per CFAI, the quoting convention is SFr:Yen means price of one SFr in Yen( number of Yen per Sfr). = Yen per Sfr, = Yen/Sfr i.e Yen is in numerator and SFr in denominator. Correct me if i am wrong. Cheers
+1 on jblamb’s answer ; .01/.6010
Also, to cfaFour, you are right, in the instance of SFr:Yen, yen is numerator. SFr:Yen = 33.3 - 75 means this: I will have to pay 75 yen if I want to get an SFr If I want to sell an SFr tho, I will only get 33.3 Yen for it. I have never heard of a currency ever having a spread this large, but w/e.