FRM Part I · FRM Exam Part I · Foreign Exchange Markets
A trader quotes EUR/USD at 1.0840/1.0844 (bid/ask, USD per EUR). A corporate client wants to sell EUR 5 million spot to the dealer. At what rate and for how many USD will the dealer buy the euros?
The dealer buys euros at the bid rate of 1.0840, so the client receives USD 5,420,000. The ask rate of 1.0844 is the price at which the dealer would sell euros, so using it would overstate the proceeds.
- A1.0840, giving USD 5,420,000Correct
- B1.0844, giving USD 5,422,000
- C1.0842, giving USD 5,421,000
- D1.0840, giving USD 5,422,000
Explanation
The dealer buys the base currency (EUR) at the bid. The bid is 1.0840, so the dealer pays 5,000,000 x 1.0840 = USD 5,420,000. Using the ask of 1.0844 would give USD 5,422,000, which is the rate at which the dealer sells euros.
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