Question

Bid Ask $/€ £/S Wells Fargo 1.06 Citibank 0.8333 £/€ Goldman Sachs 0.87 Wells Fargo and Citibank are offering the above quotes. Is Goldman Sachs ask quote a proper quote? Hint: Calculate the cross-exchange rate bid quote for £/€ using Wells and Citi to compare to the ask quote of Goldman Sachs. the ask quote is incorrect, how much money could you earn if you had $1,500,000 and implemented the proper series of trades?

Answer 1

Calculation of Cross -exchange rate BID RATE for £/€ since we don’t have Bid rate of £/€

$/€ =1.06

£/$ = 0.8333

$/€ x £/$ = 1.06 x 0.8333

= 0.883298

That is £/€ = 0.883298 or 0.88

Goldman sachs ASK RATE for £/€ = 0.87 which is lower.

We have $1,500,000

As per Bid rate , the bank ( Wells fargo and Citi bank) willing to buy $1,500,000 for

1. Wells fargo Bid rate : 1€ = 1.06 $

Therefore for $1,500,000 , we will get 1,500,000 x 1/1.06

= 1415094.34 €

2. Citibank Bid rate = 1$ = 0.8333

Therefore for $150,000, we will get 0.8333 x 1,500,000

= 1,249,950 £

As per Cross-excahnge rate

£/€ = 0.88

1 € = 0.88 £

Therefore 1415094.34 €

= 1415094.34 € x 0.88

=1245283.02 £

Now , if we go to Goldman Sachs to sell 1415094.34 €

£/€=0.87

That is 1 € = 0.87 £

Therefore for 1415094.34 € if we sells to Goldman Sachs , we will get

=1,415,094.34 x 0.8

=1231132.075 £

Therefore , it will be loss if we sell .