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FRM Part I · FRM Exam Part I · Foreign Exchange Markets

A dealer quotes EUR/USD at 1.0850/1.0854, meaning the dealer buys euros at 1.0850 and sells euros at 1.0854 per euro. A client wants to buy EUR 5,000,000 from the dealer. How many US dollars will the client pay?

The client pays USD 5,427,000. When a client buys the base currency, the dealer sells it at the ask price of 1.0854, so 5,000,000 times 1.0854 gives the dollar cost. The bid rate applies only when the dealer buys euros from the client.

  1. AUSD 5,425,000
  2. BUSD 5,427,000Correct
  3. CUSD 5,426,000
  4. DUSD 4,607,000

Explanation

The client buys euros, so the dealer sells at the ask of 1.0854. Cost = 5,000,000 × 1.0854 = USD 5,427,000. Using the bid of 1.0850 (USD 5,425,000) is wrong because that is the rate at which the dealer buys euros.

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