Use the Financial Times quotations provided in Chapter 2, page 26, to answer the following questions.
1.a. What are the outright bid-offer quotes for the Mexico new peso (MXN) and Brazil cruzeiro real (BRR)?
The quotations from the Financial Times are shown below for these currencies. Closing Change Bid/offer Three months mid-point on day spread Rate %PA
Brazil (R$) 3.5115 -0.0795 080-150
Mexico (New Peso) 10.1800 -0.0120 750-850 10.3675 -7.4
Based up these, the outright bid-offer quotes are: Closing Bid Offer Mid-point
Brazil BRR3.5080/USD BRR3.5150/USD BRR3.5115/USD
Mexico MXN10.1750/USD MXN10.1850/USD MXN10.1800/USD
b. Are these quotes European or American?
Answer. European, because they are on a per USD basis. If these were on a per BRR or per MXN basis, they would be American.
c. Are these quotes direct or indirect?
Answer. The quotes are direct for the USD, because they are on a per USD basis, and indirect for the BRR and MXN. If these were on a per BRR or per MXN basis, they would be direct for the BRR or MXN and indirect for the USD.
d. What is the bid-offer spread for the MXN?
Answer. 100 points, from MXN10.1750/USD to MXN10.1850/USD.
e. Would forward quotations for the MXN generally have larger or smaller bid-offer spreads than the spot quotations? Explain.
Answer. Forward quotations in general have larger bid-offer spreads compared to spot quotations. The forward market is thinner, involving less trades, and have higher risk. Hence, market makers will require greater revenue per trade in the forward market.
2. Use the outright bid-offer quotes from (1.a.) above. Now assume that a customer sells the MXN and buys the BRR.
a. What is the cross exchange rate for this transaction directly quoted for the MXN?
Answer.
Based upon these, the outright bid-offer quotes are: Closing Bid Offer
Brazil BRR3.5080/USD BRR3.5150/USD
Mexico MXN10.1750/USD MXN10.1850/USD
When a customer sells the MXN, and the MXN is quoted against the USD, the customer simultaneously buys the USD. And the customer buys the USD at the bank offer. The relevant exchange rate for this side of the transaction is MXN10.1850/USD.
When a customer buys the BRR, and the BRR is quoted against the USD, the customer simultaneously sells the USD. And the customer sells the USD at the bank bid. The relevant exchange rate for this side of the transaction is BRR3.5080/USD.
Hence, for this transaction we have MXN10.1850/USD and BRR3.5080/USD, and by transitivity, obtain MXN10.1850 = BRR3.5080.
Directly quoted for the BRR, obtain MXN2.90336374 per BRR.
Directly quoted for the MXN, obtain by taking the inverse,
BRR 0.34442808 per MXN.
b. Is the exchange rate obtained in part (2.a.) a bank bid or offer for the MXN?
Answer. Since the customer is selling the MXN, it must be a bank bid for the MXN.
3. These questions concern the quotation for the Euro in the Financial Times.
a. What was the prior trading day direct quote for the Euro?
Answer.
The quotation for the Euro appears as follows. Note in the footnote that the quotes for the Euro are direct for the Euro, unlike most other quotes that are direct for the USD.
Closing Change Bid/offer Three months mid-point on day spread Rate %PA J.P.Morgan
Euro(1.0049)* 0.9951 -0.0014 949-953 0.991 1.6
*The closing mid-point rates for the Euro and £ are shown in brackets. The other figures in both rows are in the reciprocal form in line with market convention.
Now the prior trading day quote has to consider the change on the day. Because the change on the day is negative, the prior trading day quote
