Question

An MNC wishes to sell €2 million that it has received from a French customer to obtain the US dollar.  The following alternatives are available.

Bank	Currency Pair	Bid	Ask	Commission
A	EURUSD	1.4512	1.4519	USD 250
B	EURUSD	1.4511	1.4520	USD 100
C	USDEUR	0.6890	0.6891	USD 150

12.       Among the above, which bank provides the highest amount of USD?

____    

A)        Bank A

B)        Bank B

C)        Bank C

D)        They are equally attractive

13.       Assume that Bank B transacts with two customers.  The first customer purchases €5 million and the second customer sells €5 million.  How much profit is made by Bank B?

____

A)        $3,000

B)        $3,500

C)        $4,100

D)        $4,700

Answer 1

12) Bid price is the maximum price a bank as a buyer will pay.

Bank will pay (2 million euro / Exchange rate) - Commission

Bank A will pay (2 million euro / 1.4512)  - 250 = 1,377,919.79 dollars

Bank B will pay (2 million euro / 1.4511)  - 100 = 1,378,164.76 dollars

Bank C will pay (2 million euro / 1.4514)  - 250 = 1,377,829.88 dollars (exchange rate between EUR USD is 1 / 0.6890 = 1.4514)

Bank B will pay maximum dollars.

Option B is correct.

13) Bid price is the bank as a buyer pay for euro while ask price is the price at which bank sells the euro. As selling price is more than buying price by 0.0009 (1.4520 - 1.4511). Total profit earned would be 0.0009 * 5 million + commission from buying as well as selling = 0.0009 * 5*10^⁶ + 200 = 4,700

Option D is correct.