When given the FC/DC spot exchange rate and give the bid ask spreads. You are asked to calculate the forward bid. How do you know whether to use the foreign or domestic interest rate bid or ask in the numerator or denominator?
If FC/DC, then (1+RFC)/(1+RDC)
I was referring to when to use the bid and ask quotes in the numerator and denominator…that basic fomula I understand.
I was doing the EOCs for this section last night, gave me a headache.
Forward Bid = Spot Bid*(1+RDC(Bid)/1+RFC(ask)) Forward Ask = Spot Ask*(1+RDC(ask)/1+RFC(bid)) The way I remember is: 1) You only have foreign on top when using price levels to calculate real exchange rates. Anything else and it’s DOT. Domestic On Top. 2) Asking for bid forward, bid by bid on top. 3) Asking for ask forward, ask by ask on top. Hope it makes sense - does for me.
- Asking for bid forward, bid by bid on top. 3) Asking for ask forward, ask by ask on top. Yes, I got this but, i am trying to understand this. thanks.