# Why are you allowed to buy at the bid price here?

Schweser Example: AUD:USD=0.6/0.6015 USD:MXN=10.7/10.720 AUD:MXN=6.42/6.4481 If you have 1 million MXN, and if a Mexican bank deals AUD:MXN 6.3/6.3025, you can arbitrage, given the above market rates, obviously. But the Schweser says you: 1) Sell MXN and buy AUD at the ask from the bank =1 million/6.3025=AUD 158,667 (so far so good) 2) Sell AUD and buy USD at the bid=(158,67)(.6)=USD 95,200 (huh? since when can you buy at the bid?) 3) Sell USD and buy MXN at the bid (95,200)(10.7)=MXN 1,018,643 (again huh?) I understand why having MXN 1,018643 is an arbitrage over your starting MXN 1,000,000, but why can you buy at the bid? I thought only market-makers buy at the bid… -Richard

you go around one way or the other, forget the schweser answer for now. let’s take the \$1mm MXN. we can either go around first changing it to AUD or first going to USD. I did USD first and got lucky. Let’s play. \$1mm MXN x 10.7 USD/MXN = 10.7 USD (you multiplied by the bid- always multiply by the smaller #) now you have to go to AUD, so your 10.7 USD x .6 AUD/USD = 6.42 mil AUD (again multiplying so use the smaller #) now let’s get this baby back to pesos! your quote is in AUD/MXN so you need to divide, so take the offer… 6.42mm AUD / 6.3025 AUD/MXN = 10,018,643,3.95 pesos. You started with 10 mil, your arbitrage is 18,643.95 pesos i find on these, as long as i write out the currency liek AUD/USD or whatever and remember to cxl out, it works fine. Multiply by the smaller #, divide by the bigger one- you’ll be worse off every time. Hope that helps.

Bannisja: Thank you, but doesn’t USD:MXN mean MXN/USD? I understand in your first calculation that 1milion MXN *10.7 (USD/MXN)=10.7 USD because the MXN terms cancel out, but the quote is USD:MXN=10.7/10.72, which means MXN/USD=10.7, so USD/MXN=1/10.7. Don’t you use the calculation 1 million MXN*(1/10.7 USD/MXN)? I thought the A:B convention implies that the fraction form is written as B/A. -Richard

rellison Wrote: ------------------------------------------------------- > I thought the A:B convention implies that the > fraction form is written as B/A. True

i didn’t see that at all. i can rework, hold on.

yeah doing it with the other conventions i get the arb to be 186,433.95

so their answer to me fits if you were doing it AUD/USD, etc. if you do it using USD/AUD, etc, i’m getting that # above. i think schweser probably f’d up that notation, but i certainly welcome others to comment. tri-arb is usually my friend so i hope i haven’t reached a stumbling block here.

yeah , these are the same: AUD:USD=0.6/0.6015 USD:MXN=10.7/10.720 AUD:MXN=6.42/6.4481 USD/AUD=0.6/0.6015 MXN/USD=10.7/10.720 MXN/AUD=6.42/6.4481 They actually changed the symbol this year in CFAI to “:” rather than “/” , which adds to the confusion as the values are switched (as seen above). I personally can’t calculate or think of things with the “:” notation so just change the question to “/” really quick when doing these problems.

then you’d agree that their answer is f’d if that’s the case?

bannisja Wrote: ------------------------------------------------------- Multiply by the smaller > #, divide by the bigger one- you’ll be worse off > every time. > > Hope that helps. Yes, thank you bannisja, that actually helps me quite a bit! For the problem, I write out each step as dimensional analysis (using cross multiplication): (1 MXN / 1) * (1 AUD / 6.3025 MXN) = 0.158667 AUD (0.158667 AUD / 1) * (0.6 USD / 1 AUD) = 0.0952 USD (0.0952 USD / 1) * (10.7 MXN / 1 USD) = 1.018643 MXN That way I can see each currency cancel out, and with bannisja’s point that the big number goes on the bottom (because you’re dividing by it), and the small number goes on the top (because you’re multiplying by it), the only other thing to remember is the : vs / convention (MXN : AUD = AUD / MXN)

as for the original question, flip the quotes around: AUD:USD=0.6/0.6015 = USD:AUD=1.6625/1.6667 (because 1/0.6 = 1.6667, etc) whereas in the AUD:USD convention, you “Sell AUD and buy USD at the bid” now you can use USD:AUD and “Sell AUD and buy USD at the ask” to confirm: 0.6 USD / 1 AUD = 1.6667 AUD / 1 USD Does that help?

So now I’m confused: I understand that USD:EUR=EUR/USD, and that when converting from USD:EUR to EUR:USD, take the inverse, using the smaller number as the bid and bigger number as the ask. But, why was Schweser buying at the bid prices in my example above? Isn’t it the market-maker who buys at the bid and sells at the ask? -Richard

rellison Wrote: ------------------------------------------------------- > So now I’m confused: I understand that > USD:EUR=EUR/USD, and that when converting from > USD:EUR to EUR:USD, take the inverse, using the > smaller number as the bid and bigger number as the > ask. But, why was Schweser buying at the bid > prices in my example above? Isn’t it the > market-maker who buys at the bid and sells at the > ask? > > -Richard banni’s answer looks right above, but schweser looks right as well. schweser is just doing this differently. as long as you are getting f’ed by the dealer, you are doing it right. ___________________________________________________________ 2) Sell AUD and buy USD at the bid=(158,667)(.6)=USD 95,200 (huh? since when can you buy at the bid?) ___________________________________________________________ i) You have 158,667AUD and want to convert to USD. Hence, a AUD/USD conversion. ii) The rate above is USD/AUD=0.6/0.6015. iii) When converting AUD to USD you can either divide by the ask when it is AUD/USD, or multiply by the bid when it is USD/AUD. Schweser’s verbiage is including a shortcut whereby you can multiply by the bid, which is really the ask for you. ie Schweser = 158,667 * .6. = 95,200. If you multiplied 158,667 * .6015 you would get more money, which would be WRONG because you always want to get f’ed by the dealer. other way if you converted the rates to AUD/USD, it would show (1/.6015) and (1/.6) 1/.6 is the ask we want to use = 1.666666 158,667 / 1.66666 = 95,200 to check, 1/.6015 = 1.662510 and 158,667/1.662510 = 95,438, which means you are getting more money, and not getting f’ed by the dealer, so can’t be right rate to use

i still don’t think the answer is right, though, if schweser’s conventions of AUD:USD or whatever are correct to equal USD/AUD. I matched up their answer when I used AUD:USD to mean AUD/USD which is not right. i think this is what rellison was getting at in the 1st place. do the actual problem out and tell me what you get as the answer using the AUD:USD, etc, to mean USD/AUD.

bannisja Wrote: ------------------------------------------------------- > i still don’t think the answer is right, though, > if schweser’s conventions of AUD:USD or whatever > are correct to equal USD/AUD. I matched up their > answer when I used AUD:USD to mean AUD/USD which > is not right. i think this is what rellison was > getting at in the 1st place. do the actual > problem out and tell me what you get as the answer > using the AUD:USD, etc, to mean USD/AUD. ok I like dividing straight through, so a. \$1,000,000MXN / 6.3025MXN/AUD = \$158,667.1956AUD b. \$158,667.1956AUD / 1.666666666AUD/USD = \$95,200.3174USD c. \$95,200.3174USD / .093458 USD/MXN = \$1,018,642.785

^ that looks kosher to me

Schweser is correct. Think of it this way, as an example: For CAD:USD = 0.8 / 0.805 The bid is the 0.8. The dealer will pay \$.80 USD for \$1 CDN. The dealer “bids” (ie is willing to pay 0.8 USD for \$1 CDN). This is no different than the bid on the stock, you were long a stock and now going to sell it; you can only initiate a transaction if you sell to the quote book bid price, otherwise there is a price spread. The ask is 0.805. The dealer ASKS for \$0.805 USD to give you \$1 CDN; you can only initiate the transaction if you, the buyer, puts in a bid at the ask price. *_ITS NO DIFFERENT THAN BID/ASK QUOTES WHEN TRADING STOCKS_* Where is the underline button?

philip.platt is killin’ it

TheAliMan Wrote: ------------------------------------------------------- > philip.platt is killin’ it haha don’t know about that. just trying to squeak by with a pass this year on L2 and trying to keep up with the likes of you , banninja, swaptionG, and Chuck Phreaking Knorris