CFA Practice Question

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CFA Practice Question

Suppose the Brazilian real is quoted at $:R = 0.9955 - 1.0076 and the Thai baht is quoted at $:B = 25.2513 - 3986. What is the direct quote for the real in Bangkok (R:B)?

A. 30.5541 - 6456
B. 25.1376 - 2654
C. 25.0608 - 5134
Correct Answer: C

Bid cross rate for the real (R:B) = 25.2513/1.0076 = 25.0608
Ask cross rate for the real = 25.3986/0.9955 = 25.5134
Therefore, the direct quotes for the real in Bangkok (R:B) are 25.0608 - 5134.

User Contributed Comments 9

User Comment
schweitzdm I can't be the only one loathing this section
robbiecow Best way to think about this is if you get it the question in Bid-Ask format and are asked for the cross rate just think of the letter "X" for cross and align each Bid-Ask to the correct point.
ankurwa10 Please explain the entire approach Robbiecow, including how you solved it. Thanks
ankurwa10 On second thoughts, here's how I got the answer right. Don't know if the approach is right.

the concept of cross-currency is that: you sell one currency (GBP) to get some $; and then use this $ to buy another currency (Bhat)

now, when selling GBP --> you need the highest price, so use the ask rate.

i.e. since $:R => R/$ = 1.0076 (remember the reading where it says that if S => a:b (in division terms it is b/a)

when buying Bhat --> you need the cheapest price, so use the bid rate.

i.e. since $:B => B/$ = 25.2513

Now, solve to eliminate the $, you get R/B = 25.2513 and since R/B => B:R which is the Direct quote for Bhat:GBP.

What I am confused about is why do separate bid/ask rate calculations. Also, does the concept I outlined above apply to this method (that of calculating bid and ask spread)
oprea_cl QUICK TIP: If the BASE currency is on:
1. Same side - cross divide the quotes (larger nr / smaller number)
2. Different sides - multiply same side
davidt876 Price/Base ask - buy base
Price/Base bid - sell base

THB/BRL ask - price in THB to buy 1 BRL (buy base)
THB/BRL bid - value of THB received when selling 1 BRL (sell base)

you only need to calculate 1 to eliminate the other answers. I chose to find the bid by seeing how much THB i get for selling 1 BRL

Sell 1 BRL & Buy 'x' USD - use ask price of BRL/USD because you're buying base:

ask = 1.0076 BRL/USD
[invert the ask price to end in USD and not BRL^2/USD]
x = 0.992457 USD/BRL * 1 BRL
x = 0.992457 USD

Sell USD & Buy 'y' THB - use bid price of THB/USD because now you're selling base:

bid = 25.2513 THB/USD
[don't invert because otherwise you'll end up with USD^2/THB]
y = 25.2513 THB/USD * 0.992457 USD
y = 25.0608 THB
ashish100 Find value 1 unit of currency used on both sides.

Use two values and equal them together

skarthi146 if we are clear on two things then we can tackle any combination

1) if A/B bid - offer is given, then
B/A bid = 1 / A/B offer
B/A ask = 1/ A/B bid

2) A/B and B/C bids and asks are given and if we need to compute A/C bid-ask then we can get it by direct multiplication (i mean A/B * B/C, B cancels out and A/C remains).
A/C bid = A/B bid * B/C bid
A/C ask = A/B ask * B/C ask

suppose we are given A/B and C/B bids and asks and need to compute A/C bid-ask then, first find out the B/C bid-ask using C/B and formula given in my first point. Then follow the second point.
khalifa92 A/C bid= (A/B)bid * (B/C)bid
A/C bid= (A/B)bid * (1/(C/B)offer)
A/C bid= (A/B)bid / (C/B)offer
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