Hi, I’m in a spot of bother with the exchange rates as quoted in Reading 36- EOC Questions 13, 15 and 16. In question 16, the ask rate is in the denominator while calculating the answer whereas in question 15 we multiply by the ask rate, which is a similar case. Can somebody explain me what is happening? They both are direct quotes right? Thanks, Anirudh
Direct quote is a relative term. Its the rate in terms of buyer’s currency. If I hold JPY and want a buy USD then 100 JPY per USD is the direct quote. If I hold USD and want to buy JPY then .01 USD per JPY is the direct quote. Working though bids, asks, crosses and interest rates is the scary part. Do and redo the examples and EOC questions, you will get it.
5 apples per dollar, not one dollar per 5 apples.
direct: how much of your currency is required to buy one unit of another currency ‘one euro will cost me 1.4 us dollars’ indirect: how much of another currency is bought by one unit of your currency. ‘if I spend one dollar us, I get .7143 euros.’
anirudhcfa, I approach it mathematically. In 15, you have to arrive at cost. To get cost, pound and pound will cancel out only if you multiply. In 16, yo have to arrive Euro cost. To get Euro cost, TW$ and TW$ will cancel out only if you divide.
Setting up equalities has been the best approach for me with this. Here’s an example off the top of my head: $:€; = .8500 - .8510 You want to buy $500, and your native currency is €; how many € will it cost you to get the 500 based on the above? Realize that the above quotes are in the format of € per dollar. Realize also that the bid is what you will get if you are selling the currency on the left, and the ask is what you will need to pay in order to get the currency on the left. If all else fails, just remember you need to do the thing that costs you the most money (or alternatively, makes you the least money if you are selling off a currency). You can set the equation up this way: (€0.8510)/(1) = X/$500 solving for X, you get €425.50, and there’s your answer. Suppose you the question is this: you have 2500 and want to know many pounds you can get for them. set up the equation using the bid price, since you are selling the currency on the left: (€0.8500)/(1) = X/$2500 solving for X, $2500 will get you €2125. If you had been trying to buy $2500 though, the $2500 would have cost you €2127.50. In short, I find it helpful to always put the exchange rate in an (X/Y) = (x/y) equality, being sure that I’m using the proper bid or ask quote for what I’m doing. hope that helps.
had to edit the above cuz the stupid Euro symbol that I posted from MS word didn’t work, it just kept showing up like this: ₤. I originally tried it in pounds, it didn’t go so well
Always start by setting the quotes in and euro terms. bid: e 0.8500/, ask: e 0.8510/ (this for buying and selling the , buy at the ask, sell at the bid) bid: $1.1483/e, ask: $1.1765/e (this for buying and selling the euro, buy at the ask, sell at the bid) Any question can then be easily solved.