Exchange rate notation

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pepp

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Book 4-Equity, pg 92, problem # 10
Euro:$ = .9790 - 9795
How do you read it?
a) for one dollar, investor can buy .9790 euros.
b) for one dollar, investor can buy .9795 euros.
c) 1 euro costs .9795 dollars
d) 1 euro costs .9790 dollars
based on 10a answer, obviously text is doing option C. and i am PUZZLED!!! can someone explain why not D? since the investor’s home country is USA, i realize its an direct quote (ie what’s the cost of buying 1 foreign currency in home currency units). but are we to infer if the quote is in direct/indirect quote? Any thoughts/suggestions pls on this exchange rate notation. it’s killing me.
 
Euro:$ = .9790 - 9795
means you can buy a Euro off the dealer for $.9795, but if you sell him a euro, he’ll only give you $.9790. (As in C is correct, as you’ve outlined above).
I really doubt the text would be so careless to make a mistake like thinking a) is the way to read that, so my intuition is that there must be another angle to the problem (or maybe a typo somewhere). for what it’s worth, you can be confident in your ability to read currency exchange rates properly : /
 
€:$ = .9790 - .9795 is direct quote for one who holds $. Read as €/$.
$:€ = 1/.9795 - 1/.9790 is indirect quote. Read as $/€.
If you observe carefully you take inverse of ask and inverse of bid for indirect quote bid - ask. The intuition is that always bid > ask. Seller or banker buys low and sells high, always makes profit.
(a) is the only right way to read. $1 buys €.9790
On the contrary, €.9790 will not buy you $1. You need to pay €.9795
From the indirect quote above €1 costs $1/.9790
On contrary, if you sell €1 you will not receive $1/.9790. You receive $1/.9795
 
So A and C are both correct way to read.
for 1$ you can buy .9790 euros = 1 euro costs .9795 dollars ? Are these two statements equivalent?
 
Euro:$ = .9790 - 9795
Think of it like this:
IBM:$ = .9790 - 9795
You can buy one share of IBM for $0.9795, and you can sell one share of IBM for $0.9790.
Ignore direct and indirect confusion altogether….assuming you have traded stocks before.
 
oh, yeah, misread a).
Euro:$ = .9790 - .9795
$:Euro = 1.020929 - 1.02145
here’s the whole story:
give the guy a dollar, get 1.020929 euros
give the guy a euro, get .9790 dollars
to buy a dollar, you will pay 1.02145 euros
to buy a euro, you will pay .9795 dollars
my bad for before, not sure what i was thinking.
 
pepp Wrote:
——————————————————-
> So A and C are both correct way to read.
>
> for 1$ you can buy .9790 euros = 1 euro costs
> .9795 dollars ? Are these two statements
> equivalent?
with 1$ you can buy 1.020929 euros
to buy 1 euro, you will need to spend .9795 dollars.
so you were right on the second part there, but not the first.
 
janardhanc Wrote:
——————————————————-
> €:$ = .9790 - .9795 is direct quote for
> one who holds $. Read as €/$.
> $:€ = 1/.9795 - 1/.9790 is indirect quote.
> Read as $/€.
>
> If you observe carefully you take inverse of ask
> and inverse of bid for indirect quote bid - ask.
> The intuition is that always bid > ask. Seller or
> banker buys low and sells high, always makes
> profit.
>
> (a) is the only right way to read. $1 buys €.9790
>
> On the contrary, €.9790 will not buy you $1. You
> need to pay €.9795
>
> From the indirect quote above €1 costs $1/.9790
> On contrary, if you sell €1 you will not receive
> $1/.9790. You receive $1/.9795
this guy is messing me up, so I’m going to straighten it out:
> On the contrary, €.9790 will not buy you $1. [CORRECT] You
> need to pay €.9795 [INCORRECT, need to pay €1.02145 for 1$]
> On contrary, if you sell €1 you will not receive
> $1/.9790. You receive $1/.9795 [INCORRECT, if you sell €1, you will get $.9790]
 
Magicskyfairy, I stick to what I wrote. Sorry to say, you got it wrong. I am sure you will spend few more sleepless nights with exchange rates. Good luck.
 
janardhanc Wrote:
——————————————————-
> €:$ = .9790 - .9795 is direct quote for
> one who holds $. Read as €/$.
> $:€ = 1/.9795 - 1/.9790 is indirect quote.
> Read as $/€.
>
> If you observe carefully you take inverse of ask
> and inverse of bid for indirect quote bid - ask.
> The intuition is that always bid > ask. Seller or
> banker buys low and sells high, always makes
> profit.
>
> (a) is the only right way to read. $1 buys €.9790
>
> On the contrary, €.9790 will not buy you $1. You
> need to pay €.9795
>
> From the indirect quote above €1 costs $1/.9790
> On contrary, if you sell €1 you will not receive
> $1/.9790. You receive $1/.9795
Good post!
Is there a way we could ban posters that keep posting incorrect stuff and then challenge those who post correct? This is a place where some people come to clarify concepts, not to get them wrong!!
 
> janardhanc Wrote:
> ————————————————–
> —–
> > On the contrary, €.9790 will not buy you $1.
> You
> > need to pay €.9795
> >
>
I agree with the fairy. You need to pay €1.02145 to buy $1, not €.9795.
Need to look at $:€, where the price of $1 is expressed in Euros.
 
Give the guy a break, he has it right *but* he flipped the notation. He said:
> €:$ = .9790 - .9795 is direct quote for
> one who holds $. Read as €/$.
> $:€ = 1/.9795 - 1/.9790 is indirect quote.
> Read as $/€.
The last line should say “… Read as €/$”, and the rest of the calculation adjusted.
 
Dreary Wrote:
——————————————————-
> Give the guy a break, he has it right *but* he
> flipped the notation. He said:
>
> > €:$ = .9790 - .9795 is direct quote for
> > one who holds $. Read as €/$.
> > $:€ = 1/.9795 - 1/.9790 is indirect quote.
> > Read as $/€.
>
> The last line should say “… Read as €/$”, and
> the rest of the calculation adjusted.
I’m gonna respond to this with a quote from that motivational quote post that some guy did a few threads ago:
“The difference between failure and success is doing a thing nearly right and doing a thing exactly right.” Edward Simmons
 
For my own sanity:
[Page 635, read last 4 lines of Currency Exchange Rate Quotations section]
€:$ = .9790 - .9795 is direct quote for one who holds $. Read as €/$.
[Page 635]
$:€ = 1/.9795 - 1/.9790 is indirect quote. Read as $/€.
[Page 639, see bullet points]
If you observe carefully you take inverse of ask and inverse of bid for indirect quote bid - ask. The intuition is that always bid > ask. Seller or banker buys low and sells high, always makes profit.
[Think, you just paid $1 and bought €.9790. Immediately you took a U turn and said to bank “here is €.9790 give me back my $1”. The bank denies and would say you pay €.9795 to get your $1 back]
(a) is the only right way to read. $1 buys €.9790
On the contrary, €.9790 will not buy you $1. You need to pay €.9795
[Think, you just paid $1/.9790=$1.02145 and bought €1. Immediately you took a U turn and said to bank “here is €1 give me back my $1/.9790=$1.02145”. The bank denies and would say I pay $1/.9795=1.0209 for your €1]
From the indirect quote above €1 costs $1/.9790
On contrary, if you sell €1 you will not receive $1/.9790. You receive $1/.9795
I had to say this, I stick to my statements in totality.
 
janardhanc Wrote:
——————————————————-
> For my own sanity:
>
>
> €:$ = .9790 - .9795 is direct quote for one who
> holds $. Read as €/$.
>
>
> $:€ = 1/.9795 - 1/.9790 is indirect quote. Read as
> $/€.
>
It’s mentioned that there is a change in notation with a warning on that page….so you’re not really wrong, you are using an old notation may be. On that same page, they say:
“To repeat, we will use €:$ to mean the price of one euro in dollars (number of dollars per euro). With this notation, the quoted currency is the first one (here, €) and its price is measured in units of the second currency (here, $)”
They are saying that e:$ means dollars per euro, i.e. $1.05/euro, i.e., one euro costs you $1.05.
 
Ok, boys and girls. let’s settle this. I am going to write few statements. FYI: they are all true. (if you disagree, let me know).
1. Euro:Dollar (€:$) is equal to the notation of Dollar/Euro ($/€)
2. Euro:Dollar means Euro is the quoted currency in terms of dollar.
3. Dollar/Euro also means you are quoting Euro in terms of dollar.
4. €:$ is a direct quote for an american investor or someone who is holding $ <- it’s called direct quote because €:$ number tells the price of euro in terms of dollar.
5. Likewise, dollar/euro tells an american investor, the cost 1 euro in dollar, hence a direct quote for american investor.
6. Cost of 1 euro in terms of dollar is same as saying: one euro costs x dollars, and also same as saying: x dollars can buy one euro.
so going back to the original problem:
Euro:$ = .9790 - 9795, remember this is the exchange rate for american investor. (ie. its a direct quote). In other words, its a cost of buying one euro in terms of dollar.
The bid on the exchange rate is .9790 (ie. the trader is telling you, he is willing to buy one euro for .9790 dollars).
The ask on the exchange rate is .9795 (ie. the trader is telling you, he is willing to sell one euro for .9795 dollars).
In the problem, if the american investor is in need of buying euros, then the trader is going to sell (ie). hence the ask (.9795) will apply. if the investor is in need of selling euros to convert to dollars, the trader would be buying euros from him, so ask (.9790) would be applicable.
any questions?
 
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