Hi all L2 canadiates: I am having trouble getting this correct consistently. Can anyone show me a way to do these questions? thank you very very much! For example, A:B 1.00-1.0015 C:B 2.0-2.01 A:C 0.3985- 0.40 start with 1000B… thanks.
Is the profit = B243?
We know from your question that B is over-valued relative to A, so we start from the currency rate A:B 1.00 - 1.0015. We are selling the over-valued currency and buying the undervalued one. Okay, so you start with 1,000B. With your 1000B, you approach the bank with quote A:B 1.00 - 1.0015. This bank wants to buy your B currency at its bid price of 1.00 and give you A currency it has in its inventory. It’ll then turn around and sell it at 1.0015. haha. Anyways, you give the bank your 1,000B and you get 1,000A (1,000 x 1.00). Now you have 1,000A. Step 2 With your 1,000A, you approach the bank with quote A:C 0.3985- 0.40. This bank, just like the previous bank wants to buy C currencies at 0.3985, then turn around and sell it at 0.40. But here you are with a A currency, which means you dont have a C currency to sell. The bank will sell its C currencies for its ask price of 0.40. You give the bank your 1,000A currency and you get 2,500C (1,000 / 0.40). Step 3 Here you repeat step 2. You don’t have B, you have C. Bank will sell its B to you at its ask price. 2,500C / 2.01 = 1,243.78B Subtract your initial 1,000B gives you profit of 243.78B. You sell at lower rate (the bid). You buy at higher rate (the ask). Now dude, don’t do that with stock trading! You should buy low and sell high! haha!
Yea! My answer was correct. Now let me explain how I did it: Step 1 I approached the dealer who was dealing with C:B. C:B means that he will purchase and sell C. So I gave him my B1000. Since I sell B1000/purchase C, he will sell C to me. Since he sells C, he will use the ask price for C:B which is 2.01. Now since the quotation stands for B2.01 for 1 C, I will inverse the equation. This will lead to: B1000*1C/B2.01 = C497.51 Step 2 Next I go to a dealer who deals with A:C. A:C means that he will purchase and sell A. So I gave him my C497.51. Since I sell C497.51/purchase A, he will sell A to me. Since he sells A, he will use the ask price for A:C which is 0.40. Now since the quotation stands for C0.40 for 1 A, I will inverse the equation. This will lead to: C497.51*1A/C0.40 = A1243.77 Step 3 Next I go to a dealer who deals with A:B. A:B means that he will purchase and sell A. So I gave him my A1243.77. Since I sell A1243.77/purchase B, he will buy A from me. Since he buys A, he will use the bid price for A:B which is 1.00. Now since the quotation stands for B1.00 for 1 A, this will lead to: A1243.77*1B/A1.00 = B1243.77 Step 4 Now I see that I started with B1000 and ended with B1243.77. This gives me a profit of B243.77
There are many ways to get these questions wrong, which is why they are difficult for people to learn. What specifically are you having problems with? Is it what rate to use, Whether to divide or multply, or which way to go? If question is what rate to use, I have a system that helps me: I always remember that the Broker Buys Base @ Bid. If the qoute is A:B; then A is the base (base is always the bottom/first currency, ie. B/A or A:B) If I have Currency A then I can sell it to the broker @ the Bid price. (you can also remember this as if I have the first currency in A:B then I use the first price in Bid - Ask relationship). In this example we actually had B so you would use the ask (or second price in Bid - ask relation) If the question is whether to divide or multiply: If you use the steps above then always multiply Bids and divide asks; works everytime. If you don’t know which way to go: Easy! just go one way - if it doesn’t work go the other way and your golden! I think the easiest way to do these is to simplify! instead of using the 1000B at the start just use 1B and multiply your answer by 1000. ie. 1/2.01/.4*1 = 1.24378*(1000) = 1243.78 or B243.78 profit!
Damil, How can you tell that B is overvalued relative to A, thus giving you a direction to work with? I’m having terrible problems with foreign currency exchange, especially arbitrage triangles. My problem is switching the notation in my head from FC:DC to DC/FC. In my head I need to get down what this is telling me about what currency the bank is buying and selling. So A:B 1 - 1.0015 means the Bank will: Buy B for 1 A Sell B for 1.0015 A And as a result: Sell A at 1B Buy A for 1.0015B Q bank Q bank Q bank
Mcaval, A:B 1 - 1.0015 means the bank will: Buy A for 1B Remember: Broker/banker Buys Base @ Bid (BBBB) in this example A is the base currency and 1 is the bid. If the banker were to buy B it would be for .9985 or 1/1.0015 (1/A ask) As far as telling which currency is overvalued relative to others is really just periphery knowledge in this type of question. If you solve the problem one way and you end up with less than you started with, do the problem again following the exchange rates in reverse. Get the basics to the problem down first before trying to master deciding which way to go. Just memorize (B)roker (B)uys (B)ase @ (B)id (ie BBBB). If you understand that you can figure out all the other rates to use.
mcaval08 Wrote: ------------------------------------------------------- > Damil, > > How can you tell that B is overvalued relative to > A, thus giving you a direction to work with? > > > I’m having terrible problems with foreign currency > exchange, especially arbitrage triangles. > > My problem is switching the notation in my head > from FC:DC to DC/FC. In my head I need to get down > what this is telling me about what currency the > bank is buying and selling. > > So A:B 1 - 1.0015 means the Bank will: > > Buy B for 1 A > Sell B for 1.0015 A > > And as a result: > > Sell A at 1B > Buy A for 1.0015B > > > > Q bank Q bank Q bank A:B 1.00-1.0015 ----------- C:B 2.0-2.01 A:C 0.3985- 0.40 The combination of the C:B & A:C quotes - B/C * A/C should give you A:B 1.00 - 1.0015, but instead it gives you 0.7970 (multiply bid) - 0.8040 (multiply ask). Since they don’t equal A:B 1.00 - 1.0015 given, there is arbitrage oppo. and the market quote A:B 1.00 - 1.0015 has B over-valued relative to A. This tells you where to start and which way to go.
Thanks FinNinja. I like the BBBB acroynm. I think I was a tad confused because Damil said the bank wants to buy currency B at the bid. But currency B in the A:B notation is not the base currency. So BBBB doesn’t stand. You stated that the banker would buy B for .9985, which contrasts with Damil’s answer. For Damil, I was just interested in how you knew to calc the A:B cross rate when you could have calculated the C:B or A:C cross rates using the given rates.
Mcaval, Unfortunately Damil is incorrect. His ultimate answer is correct though and this is why: in his first step he says “With your 1000B, you approach the bank with quote A:B 1.00 - 1.0015. This bank wants to buy your B currency at its bid price of 1.00 and give you A currency it has in its inventory. It’ll then turn around and sell it at 1.0015. haha. Anyways, you give the bank your 1,000B and you get 1,000A (1,000 x 1.00).” so first, the bank does not buy your B for A1.00 it would however sell you B for A1.00 because that would be the Ask in the B:A qoute (B:A ask = 1/A:B bid). BBBB Also Damil States: “The combination of the C:B & A:C quotes - B/C * A/C should give you A:B 1.00 - 1.0015, but instead it gives you 0.7970 (multiply bid) - 0.8040 (multiply ask). Since they don’t equal A:B 1.00 - 1.0015 given, there is arbitrage oppo. and the market quote A:B 1.00 - 1.0015 has B over-valued relative to A. This tells you where to start and which way to go.” The cross rates he states are correct however they mean that B is UNDER valued in the market - so you actually go the other way (the reason this works out in his calc is that he uses the incorrect prices in the original bid-ask quotes in his calcs. B is under valued b/c the A:B cross bid rate is .797 and the market A:B bid qoute is 1.00 it would take you more B’s in the market to buy 1A than it would by doing the triangular arb., making each B in the market less valuable than the cross rate B. If you are using the BBBB acronym and you have B but an A:B bid-ask quote multiply by 1/ask because that is the bid in the B:A qoute. I hope this helps, but like I said before you don’t really need to understand how to know which way to go, it could actually mix people up more and cause you to get the wrong answer. On the test just use the BBBB and go one way and if it doesn’t work - go the other way. If all else fails just pick D - jk
i can do these in < 30 secs (i’m not bragging, just want you guys to know a super duper easy way of approaching these…) there are two options: B -> A -> C -> B B -> C -> A -> B Hope you understand this at least. For the first option: 1000B / 1.00 x 0.3985 x 2.0 = 797 (no profit, a loss, so move on) For the second option: 1000B / 2.01 / 0.4 x 1 = 1243.8 (and since you borrowed 1000, profit = 243.8) now here’s the trick: if you want to move from B to C, you need to look at the B:C or C:B rates… and we’re only given C:B 2.0-2.01… just take 1000 / 2.01 (we’re using DIVIDE and the ASK price because we’re moving “backward”) just memorize the following For X:Y 1.01 - 1.02 if moving from X to Y (forward) just take the starting number and MULTIPLY by BID (first #) if moving from Y to X (backward) just take the starting number and DIVIDE by ASK (2nd #) then start “chaining” things up… since you have to move 3 times (i.e., exchange the currency 3 times).
Thank you very very much! the BBBB and Bid =X is really easy to remember! Thank you!!!
It’s starting to crystalize (a bit). Thanks everyone for the input.
I’m being a pest now (I know)… But on second read I found one inconsistency. I like this from adalfu: For X:Y 1.01 - 1.02 if moving from X to Y (forward) just take the starting number and MULTIPLY by BID (first #) if moving from Y to X (backward) just take the starting number and DIVIDE by ASK (2nd #) using this in the above problem A:B 1 - 1.0015 start with B 1000 You’re moving “backwards” so that would mean 1000/1.0015 which is dividing by the ask. For the first option: 1000B / 1.00 x 0.3985 x 2.0 = 797 (no profit, a loss, so move on) For the second option: 1000B / 2.01 / 0.4 x 1 = 1243.8 (and since you borrowed 1000, profit = 243.8) The second option actually follows the above logic. The first, however, divides the starting number (1000 B) by the bid and not the ask. OK I know my allotment of 3 or fewer questions on a single thread is has passed but just wanted to clarify that the first option would be 1000B/1.0015*.3985*2.0 = 795.81 which is still a loss.
oops, thanks for that catch… yes when dividing, you divide by ASK and not the 1.0 bid that i mentioned in the first option. This statement still holds: for A:B 1.000 - 1.0015 type quotes: moving “forward” = MULTIPLY by BID moving “backward” = DIVIDE by ASK
Mcaval, Correct! With a qoute of A:B 1 - 1.0015 and converting B to A you would divide by 1.0015. Good catch!
Basically if you’re buying something u do whatever screws u the most and gives u the least amount of whatever you’re buying. That’s how u figure out if u should use the Ask or Bid. If you’re selling something, same rule, whatever gives u the least amount of return.