Question

Problem 1: Suppouse a foreign exchange trader has given you the following currency exchange rates and cross rate. 1. : DKr 5.3021-33 2. $: E 0.6502-10 Given the two exchange rate quotations, find the theoretical cross rate E/DKr or what is the same, find the bid and the ask cross rates for the DKr DKr: E

Answer 1

Solution:

As per the information given in the question we have:

DKr / $ = 5.3021 – 33 ; which implies

DKr / $ = 5.3021 / 5.3021 + 0.0033

Thus DKr / $ = 5.3021 / 5.3054

Also,

£ / $ = 0.6502 – 10 which implies           

£ / $ = 0.6502 / 0.6502 + 0.0010

£ / $ = 0.6502 / 0.6512

£ / $ Bid rate = 0.6502   - ( 1 )

£ / $ Ask rate = 0.6512 - ( 2 )

To find the theoretical cross rate i.e., the bid and the ask cross rates for the DKr

Thus £ / DKr = ( £ / $ ) *   ( $ / DKr )   

We have been given the DKr / $ bid and ask rate

We will have to find $ / DKr i.e., bid ask cross rates for Dkr in terms of $ .

Calculation of $ / DKr Bid and Ask Rates

Bid Rate = 1 / ( DKr / $ ) Ask rate = 1 / 5.3054 = 0.1885 $ per Dkr - ( 3)

Ask Rate = 1 / ( DKr / $ ) Bid rate = 1 / 5.3021 = 0.1886 $ per Dkr   - ( 4)

Thus $ / DKr = 0.1885 / 0.1886

Thus using the above rates we have

Calculation of ( £ / DKr ) Bid and Ask Rates :

Bid rate of ( £ / DKr )= Bid rate of ( £ / $ )   * Bid rate of ( $ / DKr )

= ( 0.6502 £ per $ ) * ( 0.1885 $ per DKr )                    -    [ Which is ( 1) * (3) ]

= 0.1226 £ per DKr                                      

Ask rate of ( £ / DKr ) = Ask rate of ( £ / $ )   * Ask rate of ( $ / DKr )

= ( 0.6512 £ per $ ) * ( 0.1886 $ per DKr ) - [ Which is ( 2 ) * ( 4 ) ]

= 0.1228 £ per DKr

Thus the cross rate for ( £ / DKr ) = 0.1226 / 0.1228

Which can also be written as

( £ / DKr )= 0.1226 – 02