Question2 You are assisting a senior dealer on the FX desk at Morgan Stanley London. The team is monitoring three major currency pairs for potential short-term arbitrage opportunities. The interbank screen shows the following spot quotations: [table]
Currency Pair | Bid | Offer GBP/USD | 1.3335 | 1.3350 USD/CHF | 0.9205 | 0.9215
[/table] Based on the information above, what is the implied GBP/CHF two-way quotation? 1.2305 - 1.2280 1.2250 - 1.2270 1.2280 - 1.2305 1.2302 - 1.2275 1.2275 - 1.2302 ResetMaximum marks: 1 Flag question undefined

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BlackTom AI · Accepted Answer

We start by restating the problem: we are given spot quotes for GBP/USD and USD/CHF, and we need the implied GBP/CHF two-way quotation.

Option set to consider: 1) 1.2305 - 1.2280  2) 1.2250 - 1.2270  3) 1.2280 - 1.2305  4) 1.2302 - 1.2275  5) 1.2275 - 1.2302

Step-by-step cross-rate calculation idea: to obtain GBP/CHF cross quotes, multiply GBP/USD by USD/CHF. The cross bid (GBP/USD bid times USD/CHF bid) gives the price to buy CHF with GBP (i.e., how many CHF you get per GBP when selling GBP), while the cross ask (GBP/USD ask times USD/CHF ask) gives the price to sell CHF for GBP (i.e., how many CHF you must pay per GBP).

Compute the cross bid: GBP/USD bid = 1.3335 and USD/CHF bid = 0.9205. Multiply 1.3335 × 0.9205.
- 1.3335 × 0.9205 ≈ (1.3335 × 0.92) + (1.3335 × 0.0005)
- (1.3335 × 0.92) = 1.22682
- (1.3335 × 0.0005) = 0.00066675
- Sum ≈ 1.22748675, which rounds to about 1.2275.
So the cross bid is around 1.2275.

Compute the cross ask: GBP/USD ask = 1.3350 and USD/CHF offer = 0.9215. Multiply 1.3350 × 0.9215.
- 1.3350 × 0.9215 ≈ (1.3350 × 0.92) + (1.3350 × 0.0015)
- (1.3350 × 0.92) = 1.2282
- (1.3350 × 0.0015) = 0.0020025
- Sum ≈ 1.2302025, which rounds to about 1.2302.
So the cross ask is around 1.2302.

Thus, the implied GBP/CHF two-way quotation from the given quotes is approximately 1.2275 (bid) – 1.2302 (ask).

Now compare with the provided options to identify which one matches this cross-rate interpretation.
- Option 1: 1.2305 - 1.2280. This reverses the bid/ask ordering and uses values that do not align with the calculated cross bid/ask.
- Option 2: 1.2250 - 1.2270. This is significantly lower than our cross-rate estimates and does not fit the data.
- Option 3: 1.2280 - 1.2305. This is close to the calculated levels, but the bid/ask ordering and rounded values differ from the precise multiplication results we computed.
- Option 4: 1.2302 - 1.2275. This option presents the calculated ask and bid in the correct order and rounded values match our results (cross bid ≈ 1.2275, cross ask ≈ 1.2302).
- Option 5: 1.2275 - 1.2302. This exactly states the cross bid and cross ask we calculated, but it would depend on whether the market convention lists bid first and offer second; however, the given data typically uses bid as the price you can sell GBP for CHF and offer as price to buy CHF with GBP, which aligns with 1.2275 bid and 1.2302 ask as in Option 5.

In this analysis, the cross-rate computation yields a bid around 1.2275 and an ask around 1.2302, and among the given choices, the option that aligns with those computed values (considering the standard convention of bid first, then ask) is the one that presents 1.2275 as the bid and 1.2302 as the ask.

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