1) Forex Quotes, Spreads Exam Questions and Answers

1) Forex Quotes, Spreads Exam Questions and
Answers

1. All of the following factors are likely to contribute to an increase
in USD/EUR dealer spread except Correct Answer:
A)
increase in the volatility of EUR/USD spot
rate. B)
increase in the EUR/USD spread in the interbank
market. C)
smaller order size.
Correct Answer: C)
smaller order size.
Dealer spreads are lower for smaller orders as compared to larger orders. Dealer spreads are larger when
spreads in the interbank market are higher. An increase in spot rate volatility will increase spreads in the
interbank market. (Module 5.1, LOS 5.a)
2. The bid-ask quotes for the USD, GBP, and EUR are Correct Answer:
EUR/USD Correct Answer: 0.7000 − 0.7010USD/GBP Correct Answer:
1.7000 − 1.7010EUR/GBP Correct Answer: 1.2000 − 1.2010
The potential arbitrage profit from a triangular arbitrage based on
an initial position of 1 million USD is closest to Correct Answer:
A)
USD0
. B)
USD7,21
2. C)
USD6,372.
Correct
Answer: C)
USD6,372.
If we start with 1 million USD and move clockwise around the triangle (USD to GBP to EUR to USD), we
first convert 1 million USD into GBP at the ask Correct Answer:
1 million USD1.7010 USD/GBP=587,889 GBP1 million USD1.7010 USD/GBP=587,889 GBP


,1) Forex Quotes, Spreads Exam Questions and
Answers
Then we sell the GBP for EUR at the bid Correct Answer:
587,889 GBP×(1.2000 EURGBP)=705,467 EUR587,889 GBP×(1.2000 EURGBP)=705,467 EUR
Finally, we purchase USD at the ask in euros Correct Answer:
705,467 EUR0.7010=1,006,372 USD705,467 EUR0.7010=1,006,372 USD
Arbitrage profits are 1,006,372 USD − 1,000,000 USD = 6,372 USD. (Module 5.1, LOS 5.b)






,1) Forex Quotes, Spreads Exam Questions and
Answers
3. Smith is to determine the premium/discount for an annual (360-
day) forward contract using the exchange rate data presented in
Exhibit 1.
Exhibit 1 Correct Answer:

Spot (INR/GBP) Correct Answer: 79.5093.
Annual (360-day) MRR (GBP)
Correct Answer: 5.43% Annual
(360-day) MRR (INR) Correct
Answer: 7.52%
Based on Exhibit 1, the forward premium (discount) for a 360-day
INR/GBP forward contract is closest to Correct Answer:
A.-1.546.
B.1.546.
C.1.576. Correct
Answer:
C.1.576.
C is correct. The equation to calculate the forward premium (discount) is Correct Answer:
/
5−59/5Q=5F/
5QS[5F35QS6540S5]1P+[535Va64055]bQ(P−55)5V5.NFVaf5/5dSY−QbS5f/
Nd=5SYf/dActual3601+idActual360if−id.
Sf/d is the spot rate with GBP the base currency or d and INR the foreign currency or f. Sf/d per Exhibit
1 is 79.5093, if is equal to 7.52%, and id is equal to 5.43%.
With GBP as the base currency (i.e., the "domestic" currency) in the INR/GBP quote, substituting in the
relevant base currency values from Exhibit 1 yields the following Correct Answer:
/5−59/5Q=5F7QS95.5S093[360360]1+0.0543[360360]
(0.0752−0.0543)./5−59/5Q=5F7QS95.5S093(11.0543)
(0.0752−0.0543)./5−59/5Q=5F1QS.557S6.
4. Mehmet is also looking at two possible trades to determine
their profit potential. The first trade involves a possible triangular


,1) Forex Quotes, Spreads Exam Questions and
Answers
arbitrage trade using the Swiss, US, and Brazilian currencies, to be
executed based on a dealer's bid/offer rate quote of 0.2355/0.2358 in
CHF/BRL and the interbank spot rate quotes presented in Exhibit 2.
Exhibit 2 Correct Answer:
Currency Pair Correct
Answer: Bid/Offer
CHF/USD Correct Answer:
0..9801
BRL/USD Correct Answer: 4..1702
Based on Exhibit 2, the most appropriate recommendation
regarding the tri- angular arbitrage trade is to Correct Answer:
A. decline the trade, because no arbitrage profits are possible.
B. execute the trade, buy BRL in the interbank market, and sell BRL to
the