Up the bid and down the ask method

CFA Level II
#1

Hi all, I am not clear with this method. can somebody explain this with this example that I have been trying to solve: USD/GBP 2.0010-20 USD/SFr 0.8550-60 Calculate bid ask for GBP/SFr Thanks

#2

[USD/SFR]/[USD/GBP] = [GBP/SFR] so now 0.8550/2.0020 = Bid 0.8560 / 2.0010 = Ask

#3

Cp, I understand the numerator/denominator algebra to arrive at GBP/SFR However, can you explain what numbers have you used for bid ask calculations? Many thanks

#4

Please read the book. 0.8550-60 means 0.8550-0.8560, similarly for the other.

#5

I think he is asking how the bid/ask got flipped… Do it like this: USD/GBP 2.0010-20 Since you want GBP to be the numerator, flip this quote and swap the bid/ask: GBP/USD 1/2.0020 - 1/2.0010 Next quote is ready since SRr is already in the denominator, so you just multiply: GBP/SFr = GBP/USD * USD/SFr = 1/2.002 * 0.8550 = 0.42707 bid, GBP/SFr = GBP/USD * USD/SFr = 1/2.001 * 0.8560 = 0.42779 ask.

#6

When I do these ones, I just think: Bid . . . you want the lowest bid, so it is (Low / High) = .8550 / 2.0020 Ask . . . you want the highest ask, so it is (High / Low) = .8560 / 2.0010 not really sure what up the bid and down the ask method is, but just throwing another method out here if it helps

#7

the way Andrew Holmes explained it this is what I understand say that you have a FX quote USD ____ GBP if you were converting your USD to GBP … you are going down the quotation USD down to GBP so you go down the ask ( you will use ask quote) say you were going from GBP to USD … you would go up the bid (GBP to USD) looking at it again CHF ____ USD if you are going CHF to USD (down the ask) if you are going USD TO CHF (up the ask) hope this helps … its literally a visual set up

#8

philip.platt Wrote: ------------------------------------------------------- > When I do these ones, I just think: > > Bid . . . you want the lowest bid, so it is (Low / > High) = .8550 / 2.0020 > > Ask . . . you want the highest ask, so it is (High > / Low) = .8560 / 2.0010 > > > not really sure what up the bid and down the ask > method is, but just throwing another method out > here if it helps Phil, Nice idea of increasing the spread. Can you explain the idea of which one to multiply/divide? Thanks

#9

as CPK noted above, we want : [USD/SFR]/[USD/GBP] = [GBP/SFR] the USD’s cancel out: = (USD/SFR) * (GBP/USD) = GBP / SFR if you get confused, just write out the multiplication equation and you can see what ends up on top and bottom in the end. Since GBP is on the bottom in this original equation, [USD/SFR]/[USD/GBP], for the bid you look for the high GBP (2.0020) and for the ask you look for the low GBP (2.0010). Do the same for the top part of the equation and always remember that you want to create the lowest bid and highest ask. If you remember that, it is hard to mess up. ie. for the bid, we have 2.0020 in the bottom, we want the lowest bid, so do we use .8550 or .8560? . . . we would use .8550 b/c it would make the bid the lowest . .

#10

in this example USD/GBP 2.0010-20 USD/SFr 0.8550-60 USD= base currency so base currencies are the same in both quotations when base currencies are the same remember the following: 1. its a case for division 2. divide across 3. look at what needs to be calculated, in this case ‘GBP/SFr’ so put the quote with counter currency on top. SFr is counter currency in the question so the quote for USD/SFr is the one that will be on top. 0.8550/2.0020 = Bid 0.8560 / 2.0010 = Ask Calculate bid ask for GBP/SFr USD is the if base currencies are different e.g. GBP/USD 2.0010-20 USD/SFr 0.8550-60 1, multiply 2. this time straight down not across *try to line them up as GBP/USD USD/SFr, when you see one currency next to the other ’ USD USD’ just multiply down.

#11

Thanks phil and audrey. Audrey, what is base currency by the way? Do you mean currency in which the price of the denominator currency is quoted? Does these idea work with triangular arbitrage as well? S

#12

base currency is domestic currency, counter currency is foregin currency. i have not tried with the arbitrage but i think it shd work. am not comfortable with the Arbitrage section yet but just try and see if it works teach me am scared of Arbitrage.

#13

I used to try to do the up the bid and down the ask but now just follow the method where I am the worst off possible. It works much better for me.

#14

DoubleDip Wrote: ------------------------------------------------------- > I used to try to do the up the bid and down the > ask but now just follow the method where I am the > worst off possible. It works much better for me. Haha, that’s what I use.