In the CFAI text Vol 3 exhibit 3 :
“For example, suppose a market participant was selling the EUR forward against the USD. Given the USD/EUR quoting convention, the EUR is the base currency. This means the market participant must use the bid rates (i.e., the market participant will “hit the bid”) given the USD/EUR quoting convention.”
Bid is buying the Euro?
Can anyone explain why we take bid rate here?
Selling EUR Buying USD
and quote is USD / EUR
So Bid on the quote – you are buying USD selling base of EUR…
With all due respect, you have this one backward.
If you have a bid-ask spread on oil of $31.50–$32.00 per bbl, the bid is the price (in USD) that they’ll pay to buy a barrel of oil, and the ask is the price (in USD) that they’ll accept to sell a barrel of oil.
As it is with oil, so it is with currencies.
Given a USD/EUR quote, the bid is the price (in USD) that the dealer will _ pay _ to _ buy _ one EUR, and the ask is the price (in USD) that the dealer will _ accept _ to _ sell _ one EUR.
maybe … but how then do you reconcile with the quote in the book
"This means the market participant must use the bid rates (i.e., the market participant will “hit the bid”) given the USD/EUR quoting convention.”
to sell EUR Forward against the USD?
Maybe?_ Maybe!? _
Sheesh!
If you’re selling the EUR forward, then the dealer’s buying EUR . . . using the bid rate.
sorry … not thinking straight. and meant no offence when I said “maybe” above. Sorry about that.
and thanks for clarifying as always.
You can’t seriously think I was offended by you writing “maybe”.
I’ve probably made more mistakes here by not thinking before typing than you have.
I’m happy to help.
Becuase if you are selling the EUR, the dealer is buying it from you at the BID rate.