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Tutorial 4 Solutions: FOREX 1 (a) The Commodity Rate is first. The Terms Rate is second. The Bid Rate (buy) is first. The Offer Rate (sell) is second, this rate is also called the Ask rate. USD/EUR 0.7475-85 The Commodity currency is the US dollar The Terms currency is the Euro USD 1 = 0.7475Euro bid rate USD 1 = 0.7485Euro offer rate. The spread is EUR 0.0010 (b) AUD/JPY 92.10/20 The Commodity currency is the Australian dollar The Terms currency is the Japanese yen AUD 1 = 92.10 Japanese yen bid rate AUD 1 = 92.20 Japanese yen offer rate The spread is JPY 0.10 (c) GBP/USD 1.4350/60 The Commodity currency is the English pound The Terms currency is the US dollar GPB 1 = 1.4350 USD bid rate GPB 1 = 1.4360 USD offer rate The spread is USD 0.0010 2. Bid means the price at which the price maker will buy the commodity currency. Offer means the price at which price maker will sell of the commodity currency. The price take must always do the opposite. (a) USD/EUR 0.7475-85 *The price maker will buy the USD at 0.7475, and sell the USD at 0.7485. This means the price maker will sell the EUR at 0.7475 and buy the EUR at 0.7485. *The price taker will sell the USD at 0.7475, and buy the USD at 0.7485. This means the price taker will buy the EUR at 0.7475 and sell the EUR at 0.7485. (b) AUD/USD 0.9725-35 *The price maker will buy the AUD at 0.9725, and sell the AUD at 0.9735. This means the price maker will sell the USD at 0.9725and buy the USD at 0.9735. *The price taker will sell the AUD at 0.9725, and buy the AUD at 0.9735. This means the price taker will buy the USD at 0.9725 and sell the USD at 0.9735. (c) AUD/EUR 0.7425-50 *The price maker will buy the AUD at 0.7425, and sell the AUD at 0.7450. This means the price maker will sell the EUR at 0.7425 and buy the EUR at 0.7450. *The price taker will sell the AUD at 0.7425, and buy the AUD at 0.7450. This means the price taker will buy the EUR at 0.7425 and sell the EUR at 0.7450. 3. (a) (b) .9768 .9751

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(a) (b)

6.5423 6.5432

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You have sold HKD You have bought AUD Therefore the answer is (f) Hit on the right hand side = AUD/USD = .7623-28 you have sold Australian dollars and need to buy them back to square your position. You would move your quote to the right; ie. increase both your bid and offer rates. By increasing the bid rate, you are bidding more to buy Australian dollars and are more likely to find someone willing to sell them to you. By increasing the offer rate, you are offering to sell Australian dollars for a higher price and hence are less likely to be hit again, which will worsen your position. You have bought Australian dollars and need to sell them to square your position. You would move your quote to the left; ie. decrease both your bid and offer rates. By decreasing the offer rate, you are offering to sell Australian dollars at a lower price and are more likely to find someone willing to buy them from you. By decreasing the bid rate, you are bidding less to buy Australian dollars and hence are less likely to be hit again, which will worsen your position.

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