Currency exchange rates in Economics


On Chapter. 14 of the Scheweser 2014, I was confused with Bid-Ask rates.

Q. 1>

Entered into 90 day forward contract buy CAD 1mil. with AUD.

Spot rate: 1.0511/1.0519

90 day: +15.6/+16.8

At maturity of the contract, the spot rate is 1.0612/1/0614.

When we calculate the profit/loss in AUD for forward contract, we should use 90-day ask rate : 1.0519+16.8/10,000=1.05358. Right?



Entered into 90 day forward contract long CAD 1mil against AUD at a forward rate of 1.05358 AUD/CAD.

30 day after initiation,

Spot rate: 1.0612/1.0614

60 day: +8.6/+9.0

When we compare the forward rate with forward rate(t=30), the book said that we need to use 60 day BId rate:1.0612+8.6/10,000=1.6206

How come we need to use the ask rate in Q.1 and use the bid rate in Q.2 differently?

Please leave your advices for me.

Thank you!!!

In the first question, you’re calculating the PnL after the contract has been settled and the ask is the correct rate to use. In the second question, you’re valuing the contract prior to expiration. In order to do this you need to calculate the cost of unwinding the position by entering into an opposite contract. Hence, you need to use the bid in the second question.