Question

You are given the following spot quotes on the same pair of currencies in two different markets from two different brokers: Show the process of how you get the final answers

Quotes for the dollar against the Korean Won: 1100- 1150

Quotes for the Korean Won against the dollar: 0.00085 – 0.00097.

• Which market would you use of you want to BUY dollars?

• Which market would you use if you want to SELL dollars?

• The first pair of quotes could be made in which country?

• The second pair of quotes could be made in which country?

All the work needs to be showed! Thank you

Answer 1

Solution:

a)If have to buy the dollar, then I will prefer the first market i.e dollar against the Korean Won: 1100- 1150.Since the ask price of dollar in first market is 1150 Korean won and in second market is 1/.00085(i.e 1176.47 korean won).

b)If I have to sell the dollar,then I would prefer the first market since the bid price of dollar in first market is 1100 and in second market is 1030.93 Korean won.

c)Exchange rate qoutations can be made in two ways-Direct quotation and indirect qoutation.

Direct qoutation is when the unit of foreign currency is expressed in terms of domestic currency.Indirect qoutation is when one unit of domestic currency is expressed in terms of foreign currency.Accordingly,the first pairof qoutes could be made in USA or Korea.

d)The second pair of qoute could be made in USA or Korea.