|Author||Topic: More substance, please|
|Perusing the posts to this site over the last several weeks, it seems to me most questions/comments focus on things other than specifics about the exam itself. Although there is a forum for "Study Group", it would be nice to have some discussions about specific topics related to the exam. Accounting is troublesome for me: US GAAP vs IAS (all current method vs temporal, etc.), as well as Business Combinations. Any accountants here that have suggestions for how to think about this stuff and keep it straight?
On the flip side, my stronger areas are debt, derivatives and portfolio management, so if anyone has questions there I'd be happy to respond.
|Can anyone explain how to compute the bid-ask spread on forex given a transaction cost? The question in the Study Session #6 doesn't provide enough info for me to understand answer. Exchange is f6.35 per US1.00, with a .2% transaction cost. The answer for the spread is .1569-.1581. The bid spread is .998 squared divided by 6.35 for .1569, which makes sense to me, but how is the ask spread computed?
Thanks for help!
|Page 4, and 10-12 in the Int'l Investments textbook covers it. Per the book, formulas are:
X = -(1/DQ) + [1/(k-squared)(DQ)], where
x= max no-arb deviation
DQ = direct quote (6.35 in this case)
k = 1 - trans costs pctge (.998% in this case)
x = -(1/6.35) + [1/(6.324625)]
= -.157480 + .158112 = .000632
No arb range is:
1/DQ plus/minus x, or
1/6.35 + .000632 = .157480 + .000632 = .158112
1/6.35 - .000632 = .157480 - .000632 = .156848
Remember for DQ, most currencies are quotes in US Dollar terms, except the Euro, British Pound, Aussie Dollar and NZ Dollar, which are quoted in indirect terms (or foreign currency per unit of these currencies).