Bid Ask spread for spot rates is calculated a (Ask-Bid)/Ask, right? So why are they using only (ask-bid) in this question? (Ask-Bid) is used to calculate the spread for FORWARD rates, and never SPOT rates, right? Okay, this is the question: Donna Ackerman, CFA, is an analyst in the currency trading department at State Bank. Ackerman is training a new hire, Fred Bos, a recent college graduate with a BA in economics. Ackerman and Bos have the following information available to them: **Spot Rates** Euro/US$ 1.0000–1.0015 British Pound/US$ ₤2.0000—₤2.0100 Ackerman asks Bos to determine the bid-ask spread (the difference between the ask price and the bid price) for Euros per British pound (€/₤). The answer is: A) 0.0033 Euro/British pound. B) 0.0017 Euro/British pound. C) 0.0085 Euro/British pound. D) 0.0042 Euro/British pound. Your answer: C was incorrect. The correct answer was A) 0.0033 Euro/British pound. The bid price is €1.0000 / ₤2.0100 = 0.4975€/₤. The ask price is €1.0015 / ₤2.0000 = 0.5008€/₤. The bid-ask spread is 0.5008€/₤ -0.4975€/₤ = 0.0033€/₤. **** Basically, if I do (ask-bid)/ask, I get 0.006466, which is not even an option. So I went with C. (Lame, I know…but this was the closest). In the explanation, they just subtracted the bid quote from the Ask quote. Why? Is it because they mentioned in the question that the bid-ask spread is (ask minus bid), specifically for this question?
Just noticed- please ignore “₤” wherever it appears. I copied and pasted the question from the Qbank. Looks like there was some sort of an error while converting the Pound sign here and the pound sign has been converted to “₤”.
They were asking for ‘plain vanilla Bid/Ask spread’ and not ‘Bid/Ask spread as a percentage of ask’ so after adjustments, Euro/USD-------------1.0000(Bid)-----------1.0015(ask) USD/Pound-----------0.497512(Bid)-----------0.50000(ask) ----------------------------------------------------------------------------------------------------------- Euro/Pound----------1.0000*0.497512 (Bid)-----------------1.0015*0.50000 (Ask) Euro/Pound----------0.497512 (Bid)----------------------------0.50075 (Ask) ----------------------------------------------------------------------------------------------------------- Ans = Ask - Bid = 0.50075 - 0.497512 = 0.003238 Euro/Pound = A
Yeah, but isn’t bid-ask spread always (ask-bid)/ask? at least for spot rates it is…I can understand “plain vanilla” forward premium/discount (when it is not expressed as an annualised rate), but as far as I know, there is no “plain vanilla” bid-ask spread for spot rate. (Ask-Bid) is used only for forward rates, and not for spot rates. I find this question to be quite weird in this regard.
why is ask-bid valid only for forward rates?. you go to a currency changer and the bid-ask rates they provide are definitely the spot rates. what you are probably referring to is the forward premium/discount. but i agree, usually the spread is a %ge of the ask.the only reason to calculate it as a simple diff is probably because they mention it in the question specifically . both are valid methods :relative and absolute spreads
Dsylexic Wrote: ------------------------------------------------------- > why is ask-bid valid only for forward rates?. you > go to a currency changer and the bid-ask rates > they provide are definitely the spot rates. what > you are probably referring to is the forward > premium/discount. > I didn’t say that ask-bid is valid for forward rates only. Probably you got me wrong. I was talking about the formula for calculating the bid-ask spread for spot exchange rate and the formula for calculating the bid-ask spread for forward exchange rate. > but i agree, usually the spread is a %ge of the > ask.the only reason to calculate it as a simple > diff is probably because they mention it in the > question specifically . both are valid methods > :relative and absolute spreads Thanks for clarifying that. So, we are using (ask-bid) and not (ask-bid)/ask, because the question specifically asks us to do so.
The answer is in the solution, Ruhi, the rate you calculated is a % ie 0.6% The answers specifically says 0.0033 Euro/British pound… so they aren’t looking for a %