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Financial System Edition 2
Perdisco
Foreign exchange dealing [feedback page]
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1 of 3 ID: FS.FX.D.01.0010
The exchange rate offered by ABC foreign exchange dealer for Australian Dollars at 1 June 2006 is:
AUD/USD 0.7386 — 0.7394
b) The difference between the buy and sell prices is known as the .
Feedback [2 out of 3]
a) You are correct.
b) This is not correct.
The difference between the buy and sell prices is called the spread.
Discussion
This format indicates the buying and selling price offered by the foreign exchange dealer. The first number
indicates the price at which the dealer will buy AUD and the second number the price at which the dealer will sell
to you. From an investors perspective 0.7394 cents would be the buying price and 0.7386 would be the selling
price.
The margin between the buy and sell price is referred to as the spread, which is the cost at which a broker or a
dealer is willing to arrange foreign currency transactions. The spread helps to compensate an intermediary for
the risk it assumes from the time it starts a client trade to when the broker's net exposure is hedged. Foreign
exchange spreads also depend on the the size of transactions and the currency liquidity.
2 of 3 ID: FS.FX.D.03.0010
The following exchange rates are given:
USD 1 = AUD 1.29
USD 1 = GBP 0.54
AUD 1 = GBP 0.38
An Australian investor is looking for an arbitrage opportunity. Assuming this investor has AUD300 available (and
cannot borrow additional funds) calculate the amount of profit that can be made. Give your answer in Australian
dollars and cents to the nearest cent.
https://www.perdisco.com/elms/qsam/html/qsam.aspx 1/3
18/03/2017 Foreign exchange dealing
Profit = AUD 79.4
Feedback [0 out of 1]
This is not correct.
Profit = AUD30.48
Calculation
To gain a riskfree profit the investor must buy and sell funds in foreign currency when there is an imbalance
between exchange rates.
In this case, the investor would:
1. sell the AUD for USD
2. sell the USD for GBP
3. sell the GBP for AUD
1. The amount of USD purchased can be calculated using the following formula:
USD Purchased = AUD Sold × Exchange Rate
1
= 300 ×
1.29
= USD232.55813953...
2. The amount of GBP purchased can be calculated using the following formula:
GBP Purchased = USD Sold × Exchange Rate
0.54
= 232.55813953... ×
1
= GBP125.58139535...
3. The amount of AUD purchased can be calculated using the following formula:
AUD Purchased = GBP Sold × Exchange Rate
1
= 125.58139535... ×
0.38
= AUD330.47735618...
To avoid risk all of the above transactions would be done simultaneously resulting in a profit. This profit can be
calculated using the following formula:
Profit = AUD Purchased AUD Sold
= 330.47735618... 300
= 30.47735618...
= AUD30.48 rounded as last step
3 of 3 ID: FS.FX.D.05A
The exchange rate offered by ABC foreign exchange dealer for Australian Dollars at 1 June 2006 is:
https://www.perdisco.com/elms/qsam/html/qsam.aspx 2/3
18/03/2017 Foreign exchange dealing
AUD/USD 0.737 — 0.7379
b) The difference between the buy and sell prices is known as the .
Feedback [2 out of 3]
a) You are correct.
b) This is not correct.
The difference between the buy and sell prices is called the spread.
Discussion
This format indicates the buying and selling price offered by the foreign exchange dealer. The first number
indicates the price at which the dealer will buy AUD and the second number the price at which the dealer will sell
to you. From an investors perspective 0.7379 cents would be the buying price and 0.737 would be the selling
price.
The margin between the buy and sell price is referred to as the spread, which is the cost at which a broker or a
dealer is willing to arrange foreign currency transactions. The spread helps to compensate an intermediary for
the risk it assumes from the time it starts a client trade to when the broker's net exposure is hedged. Foreign
exchange spreads also depend on the the size of transactions and the currency liquidity.
Perdisco / latin /, v., to learn thoroughly
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