10 Questions
In the given examples, what does a BID in a currency pair represent?
The price at which the bank is willing to buy the base currency.
What would be a consequence of using ASK prices for all currency conversions in triangular arbitrage?
Reduced potential for profit due to higher prices.
Which currency pair represents a direct quotation?
GBP/USD
What type of quotation is 0,0345 EUR/CZK?
Indirect
In the context of foreign exchange market, what does a bid price represent?
The price at which a market maker is willing to buy a currency pair
How many USD will a client get for 1000 GBP based on the provided bid and ask prices?
1450.20 USD
If you are a Czech dealer, which quotation would you use: 1,3212 USD/EUR or 27,1203 CZK/EUR?
27,1203 CZK/EUR
If 1 GBP can be exchanged for 1.4510 USD, how many GBP would you need to pay for 1000 USD?
689.75 GBP
If you are an American dealer, which quotation would you use: 1,3212 USD/EUR or 28,236 CZK/USD?
28,236 CZK/USD
In a direct quotation, what does the base currency represent?
The currency being quoted
Study Notes
Triangular Arbitrage
- Triangular arbitrage involves exploiting exchange rate differences between three currencies to earn a profit
- It involves buying and selling currencies in a triangular sequence to take advantage of rate discrepancies
- Example: Buy GBP from Dealer 1, then buy CHF from Dealer 3, and finally buy USD from Dealer 2, resulting in a profit
Dealer Quotations
- Dealers provide bid (buy) and ask (sell) prices for currencies
- Dealer 1: GBP/USD, bid = 0.8527, ask = 0.8533
- Dealer 2: CHF/USD, bid = 1.623, ask = 1.6240
- Dealer 3: CHF/GBP, bid = 1.9005, ask = 1.9015
Eliminating Arbitrage
- To eliminate arbitrage, the correct quotation of Dealer 3 should be adjusted to remove the profit opportunity
Cross Rates
- Cross rates are exchange rates between two currencies, neither of which is the domestic currency
- Example: CNY/HKD, KRW/JPY, JPY/KRW, JPY/SGD
- Calculating cross rates: CNY/HKD = USD/HKD * CNY/USD
BID and ASK
- BID is the price at which a dealer buys a currency
- ASK is the price at which a dealer sells a currency
- As a client, you pay the ASK price when buying and receive the BID price when selling
Appreciation and Depreciation
- Appreciation: An increase in the value of a currency
- Depreciation: A decrease in the value of a currency
- Revaluation: A change in the official exchange rate
- Devaluation: A decrease in the official exchange rate
- Examples: CZK appreciated, EUR appreciated, VEF devalued, TRY depreciated, KZT devalued
Types of Quotations
- American quotation: Direct quote (domestic currency per unit of foreign currency)
- European quotation: Indirect quote (foreign currency per unit of domestic currency)
- Cross rate quotation: Exchange rate between two foreign currencies
- Direct quotation: Quote for immediate delivery
- Indirect quotation: Quote for future delivery
This quiz involves calculating cross rates between different currencies using exchange rates provided. The exercise includes converting Canadian Dollar (CAD) to US Dollar (USD) and Australian Dollar (AUD), along with understanding the relationship between CAD, USD, and AUD.
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