Anyone has encounter question 16 curriculum - reading 13? I dont know why they use offer rate 0.7344 rather than the bid (sell EUR) to calculate forward price
Answer: A is correct. Marking her nine-month contract to market six months later requires buying GBP/EUR three months forward. The GBP/EUR spot rate is 0.7342/0.7344, and the three-month forward points are 14.0/15.0. The three-month forward rate to use is 0.7344 + (15/10000) = 0.7359. Goldsworthy sold EUR 5,000,000 at 0.7400 and bought at 0.7359. The net cash flow at the settlement date will equal EUR 5,000,000 × (0.7400 – 0.7359) GBP/EUR = GBP 20,500. This cash flow will occur in three months, so we discount at the three-month GBP Libor rate of 58 bps:
GBP20,5001+0.0058[90360]
“Up the bid multiply, down the ask divide”
I mean they wanna sell EUR so why we use offer rate EUR (0.7344)?
did it yesterday with no problems whats the issue
short position at the beginning going long now so think of it this way if you are buying/selling base currency (EUR) from a dealer or bank, the bank or dealer will buy low(bid) from you and sell the base currency to you at high(ask)
In the case of Price currency (GBP) the bank buys high (ask) and sells low(bid). Now when u marking to market you take the opposite action of what you did at initiation.
Goldsworthy sold EUR 5million now he has to buy EUR 5million from the bank or dealer. Using the rules above u can figure it out that the ask is the appropriate.
This is also consistent with the up the bid and multiply, down the ask and divide (GBP/EUR)