Question

Citigroup quotes Danish kroner as “DKK5.62/$ Bid and DKK5.87/$ Ask.”

1. With DKK in the numerator, the “ Bid and  Ask” quotes are indirect quotes for a U.S. resident. What are the bid and ask prices in direct terms for a U.S. resident? Which currency is Citigroup buying and which currency is it selling at these prices?
2. If you sell $1 million to Citigroup at a bid price of  and simultaneously buy $1 million at their offer price of , how many Danish krona (“krona” is the plural of kroner) will you make or lose? What is Citigroup's kroner profit or loss on the transaction?

Answer 1

The direct quotes for US citizens will be = 1/5.62 = 0.17793 $/DKK (ask) and 1/5.87 = 0.17035 $/DKK (bid).

Citigroup will sell you a dollar for DKK 5.87 and will buy a dollar from you at DKK 5.62.

The difference between the bid and the ask will be = 5.87 - 5.62 = 0.25 DKK/$. Hence, I will make a loss of 0.25 million DKK by doing so because I will be buying at the ask price which is higher and selling at the lower price i.e. bid. Citigroup's profit will be exactly equal to my loss (no transaction costs). Hence, they will make DKK 0.25 million.