Question

Suppose a quote for sterling (£) in New York is $1.6050-60.

a.         What is the implied quote for dollar in New York?

1. How much will it cost to buy £500,000?
2. How much will you get if sell £500,000?

Answer 1

What is the implied quote for dollar in New York?

$/£ = 1.6050 - 1.6060

Bid ( £/$ ) = 1/Ask($/£)

= 1/1.6060

Bid ( £/$ ) = 0.6227

Ask ( £/$ ) = 1/Bid ($/£)

= 1/1.6050

Ask ( £/$ ) = 0.6231

£/$ = 0.6227-31

How much will it cost to buy £500,000?

$/£ = 1.6050 - 1.6060

£ is the product in the exchange rate. We want to buy £ . So bank need to sell £ . So ask rate is relevant.

1 £ = 1.6060$

500000£= 1.6060*500000$

=$803000

How much will you get if sell £500,000?

£ is the product in the exchange rate. We want to sell £ So bank need to buy£ So bid rate is relevant.

1 £ = 1.6050$

500000£= 1.6050*500000

= $802500