Question

An Australian firm asks the bank for an A$/SFr quote because it received SFr and wants to change it to A$. A bank is quoting the following exchange rates against the US dollar for the Swiss franc and the Australian dollar:

SFr/US$ = 1.4950--60

A$/US$ = 1.6245--50

Calculate the cross bid rate for the A$/SFR by identifying the correct formula in the attached formula sheet.

One of the following answers will be correct:

a. Bid rate A$/SFr = 1.0862

b. Bid rate A$/SFr = 1.0866

c. Bid rate A$/SFr = 1.0859

d. Bid rate A$/SFr = 1.0870

Show your workings and the correct answer in the space provided below,

For example write your answer as: Spot Bid (A$/SFR) = 1.0457/1.0392 = 1.0063

Briefly explain (in one or two sentences) what the meaning is of the A$/SFR bid rate that you calculated

Answer 1

Bid rate is the price at which the dealer is willing to buy another currency.

Given,

Exchange rates against US dollar for the Austraian dollar:

SFr/US $ = 1.4950/1.4960 (I.e.,bid rate/offer rate)

A $/US $ = 1.6245/1.6250

Cross Bid rate for A$/SFr = A$/US$*US$/SFr

A$/US$ = 1.6245 (Bid rate)

US$/SFr= 1/1.4960 (Bid rate)

*Since the currencies are not directly quoted for Us$/SFr, so in this situation 1/ask rate = Bid rate and vice versa

Cross Bid rate = A$/US$*US$/SFr

=1.6245/1.4960

=1.0859

Bid rate A$/SFr = 1.0859 (Answer C)

Explanation of what does A$/SFr mean:

The A$/SFr bid price is the number of A$ the bank is willing to pay to buy one SFr. This transaction (buy SFr-Sell A$) is equivalent to buying A$ to buy dollars (at the bid rate 1.6245 and the selling those dollars to buy SFr (at an ask rate of 1.4960)