saunders chapter 13

[hellohi]

hello @David Harper CFA FRM

in your questions at the end of Saunders chapter 13 study notes , you put this question (question number 5 in the study notes):

the question is:

The spot foreign currency exchange rate is EUR/USD $1.4296/$1.4304. Each of the following is true about this quote except:

a) The spread is 8 pips.

b) If the domestic currency is the US dollar (USD), from the perspective of an American trader, as EUR is the base currency and the USD is the quoted currency, this is direct quote.

c) We can buy one Euro for $1.4304 and sell one Euro for $1.4296.

d) If the spot rate changes to EUR/USD $1.4416/$1.4424, then the EUR has weakened and the USD has strengthened.

I wanted to ask, if you are talking about EUR (base currency) against the $ (quoted currency), so why you put ( $1.4296/$1.4304 ) both exchange rates are in $? not one currency in EUR and the other in $?

best regards,
Nabil

 

[Dr. Jayanthi Sankaran]

Hi @hellohi,

Good question - the $1.4296/$1.4304 refers to the bid-ask direct quotes. Individual investors, corporations, hedge funds etc. buy at the ask and sell at the bid. In other words, they buy one Euro for $1.4304 and sell one Euro for $1.4296. Banks acting as FX dealers make a market in select currencies. In other words, they buy at the bid and sell at the ask i.e. they buy one Euro at $1.4296 and sell one Euro at $1.4304 : the bid-ask spread which in this case is 8 pips...

Hope that helps

 

[Dr. Jayanthi Sankaran]

Thanks David - appreciate the star

Jayanthi

 

[David Harper CFA FRM]

Thank you @Dr. Jayanthi Sankaran I really like your explanation here of a difficult concept (emphasis mine): "Individual investors, corporations, hedge funds etc. buy at the ask and sell at the bid. In other words, they buy one Euro for $1.4304 and sell one Euro for $1.4296. Banks acting as FX dealers make a market in select currencies. In other words, they buy at the bid and sell at the ask i.e. they buy one Euro at $1.4296 and sell one Euro at $1.4304."

@hellohi In case it is helpful, here is the source Q&A located at https://forum.bionicturtle.com/threads/l1-t3-191-foreign-exchange-exposure.4680 i.e., the "source Q&A " is actually where we hold the original Q&A (which is linked to in the associated PQ document) and so it tends to contain key follow-on discussion.

I would just add re: "if you are talking about EUR (base currency) against the $ (quoted currency), so why you put ( $1.4296/$1.4304 ) both exchange rates are in $? not one currency in EUR and the other in $?"
Yes, it's true the FX quote typically does not need to specify both currency unites (in this case, both € and $). The reason is simply that the denominator of the FX fraction is 1.0, so it is not necessary! Skipping the bid-ask spread and just considering the midpoint of EURUSD $1.4300. This can be expressed two ways:

• As given, by EURUSD $1.4300 which is really $1.4300 per €1.0, or fractionally $1.4300/€1.0. The confusing part is that EURUSD signifies a fraction of X units of $USD per 1.0 €EUR, where EUR is the base and USD is the quote currency. Fractionally, the base is the denominator which does not need to be quoted because, by definition, it is "per 1.0 units."
• Alternatively, this could be quoted as 1/$1.70 = USDEUR €0.70 which is really EUR €0.70 per $1.0 USD because here USD is the base and EUR is the quote currency. I hope that helps!

 

[hellohi]

Hi @hellohi,

Good question - the $1.4296/$1.4304 refers to the bid-ask direct quotes. Individual investors, corporations, hedge funds etc. buy at the ask and sell at the bid. In other words, they buy one Euro for $1.4304 and sell one Euro for $1.4296. Banks acting as FX dealers make a market in select currencies. In other words, they buy at the bid and sell at the ask i.e. they buy one Euro at $1.4296 and sell one Euro at $1.4304 : the bid-ask spread which in this case is 8 pips...

Hope that helps

Thanks a lot @Dr. Jayanthi Sankaran

 

[hellohi]

Thank you @Dr. Jayanthi Sankaran I really like your explanation here of a difficult concept (emphasis mine): "Individual investors, corporations, hedge funds etc. buy at the ask and sell at the bid. In other words, they buy one Euro for $1.4304 and sell one Euro for $1.4296. Banks acting as FX dealers make a market in select currencies. In other words, they buy at the bid and sell at the ask i.e. they buy one Euro at $1.4296 and sell one Euro at $1.4304."

@hellohi In case it is helpful, here is the source Q&A located at https://forum.bionicturtle.com/threads/l1-t3-191-foreign-exchange-exposure.4680 i.e., the "source Q&A " is actually where we hold the original Q&A (which is linked to in the associated PQ document) and so it tends to contain key follow-on discussion.

I would just add re: "if you are talking about EUR (base currency) against the $ (quoted currency), so why you put ( $1.4296/$1.4304 ) both exchange rates are in $? not one currency in EUR and the other in $?"
Yes, it's true the FX quote typically does not need to specify both currency unites (in this case, both € and $). The reason is simply that the denominator of the FX fraction is 1.0, so it is not necessary! Skipping the bid-ask spread and just considering the midpoint of EURUSD $1.4300. This can be expressed two ways:

• As given, by EURUSD $1.4300 which is really $1.4300 per €1.0, or fractionally $1.4300/€1.0. The confusing part is that EURUSD signifies a fraction of X units of $USD per 1.0 €EUR, where EUR is the base and USD is the quote currency. Fractionally, the base is the denominator which does not need to be quoted because, by definition, it is "per 1.0 units."
• Alternatively, this could be quoted USDEUR €0.710 which is really EUR €0.710 per $1.0 USD because here USD is the base and EUR is the quote currency. I hope that helps!

Yes @David Harper CFA FRM it is very helpful answer easpecially the denominator idea

 

[Dr. Jayanthi Sankaran]

Hi David,

Don't want to get nitpicky about your answer:

• Alternatively, this could be quoted USDEUR €0.710 which is really EUR €0.710 per $1.0 USD because here USD is the base and EUR is the quote currency
• I get EUR 0.6991 per $1.0 USD

I don't know why...BTW, how do you get the Euro sign? Any keyboard tricks? Got it: Ctrl Alt E..

Thanks!

 

[Dr. Jayanthi Sankaran]

BTW, both Nicole and David - wish India was not 9.5 hours ahead of EST. It makes it very difficult to read, study, contribute and work in parallel....

 

[David Harper CFA FRM]

Hi @Dr. Jayanthi Sankaran Yes, my mistake, thank you! Fixed above
Re € symbol, here is what I do:

• I locate the symbols that I use often on a lookup table like this one http://www.ascii-code.com/html-symbol.php
• Then I create an entry is http://www.phraseexpress.com/ which is one of my most important tools! There are other similar programs in this category, like http://www.16software.com/breevy/ or https://smilesoftware.com/textexpander , but I like phraseexpress best, although it has a learning curve.
  
  • PE allows me to define a shortcut. In the case of the € symbol, my shortcut text is simply "euro" which means that I just need to type (euro) and, after a quick confirmation, the € symbol replaces my text! I have a large library of replacements; e.g., the path to our forum image directly, so that I can more easily upload pictures. It's a time-saver!