Cross rates with bid/ask spreads

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Aimee

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Hey guys,
A little help with these kind of questions. I ALWAYS get them wrong… I know how to calculate cross rates just fine until we throw in a bid/ask spread, and then I can never seem to come up with a correct answer. If someone can explain intuitively how to approach this that would be great… please don’t just spew a bunch of formulas at me because I’ve looked the formulas over and it doesn’t seem to click. I thought that I read to convert everything to the direct quotes in the common currency (here, the USD) and then use the two bid quotes to calculate the bid and the two ask to get the ask price, but the answer I came up with isn’t here. I’m probably making this more complicated than it is :) Thanks!
Question ID#: 89075
Given the following quotes for the Canadian dollar (CAD) and the British pound (BP), determine the CAD/BP bid-ask spread. (Note: Carry calculations to at least five decimal places)
CAD/$ Bid Ask 1.59031 - 1.59701 / CAD/$
BP/$ Bid Ask 0.69459 - 0.69686 / BP/$
A) 2.29921 - 2.31631 CAD/BP.
B) 2.28211 - 2.29921 CAD/BP.
C) 2.28957 - 3.28863 CAD/BP.
 
CAD / $ * BP/ $
Note the dollars don’t cancel, so we’re going to have to take the reciprocal of BP/$ to get get $ / BP. Note that the bid and ask change (BID WILL ALWAYS BE SMALLER THAN THE ASK)
$ / BP = 1 / 0.69686 : 1/.69459
= 1.43501:1.439698239
Now multiply by CAD / $
CAD / BP = 1.59031*1.43501 : 1.59701*1.439698239
= 2.28211: 2.2992
B
 
Answer is B, but there is a simple trick to doing these:
A) given the initial rates figure out what mathematical procedure (multiply or divide) you need to do in order to get the units into the cross-rate form that is given in the answers (here we are given CAD/$ and BP/$ and need to get these into CAD/BP). The means we need to divide: so (CAD/$)/(BP/$)=(CAD/$)*($/BP)=CAD/BP. This lets you know which mathematical calculation you need to do with the numbers. Now, if you can’t do proximate math in your head (i.e. you can’t estimate which number is bigger/smaller when you divide a fixed number by two different quantities) just divide the CAD/$ bid by the BP/$ bid and ask, then divided the CAD/$ ask by the BP/$ bid ask. This procedure will yield 4 values, pick the smallest and largest as your bid-ask cross rates (if you did the proximate math in your head you simply did this min and max step in your head prior to carrying out the division, thereby saving yourself two calculations and hence half the time).
Hope that made sense and helps.
 
Question ID#: 89075
Given the following quotes for the Canadian dollar (CAD) and the British pound (BP), determine the CAD/BP bid-ask spread. (Note: Carry calculations to at least five decimal places)
CAD/$ Bid Ask 1.59031 - 1.59701 / CAD/$
BP/$ Bid Ask 0.69459 - 0.69686 / BP/$
A) 2.29921 - 2.31631 CAD/BP.
B) 2.28211 - 2.29921 CAD/BP.
C) 2.28957 - 3.28863 CAD/BP.
To get CAD/BP -> from CAD/$ and BP/$ –> how do you get CAD/BP
CAD/BP = CAD/$ * $/BP –> so CAD/$ / BP/$
now since you are dividing and you need the smaller # in your answer
do CAD/$ Bid over BP/$ Ask.
CAD/$ Ask over BP/$ Bid
and you get your answer
CAD/BP Bid Ask 1.59031/0.69686 - 1.59701/0.69459 = 2.28211 - 2.29921
B)
 
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