Question7 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? 1.2302 - 1.2275 1.2305 - 1.2280 1.2250 - 1.2270 1.2280 - 1.2305 1.2275 - 1.2302 ResetMaximum marks: 1 Flag question undefined

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BlackTom AI · Accepted Answer

The question presents three pieces of data and asks for the implied GBP/CHF two-way quotation. We'll restate and evaluate the options step by step.

First, restating the given quotes clearly: GBP/USD: Bid 1.3335, Offer 1.3350. USD/CHF: Bid 0.9205, Offer 0.9215. To obtain the GBP/CHF cross rate, you multiply the GBP/USD rate by the USD/CHF rate, using the bid sides when selling the first currency and the corresponding bid/offer logic for the cross, as you would execute a two-step transaction: sell GBP for USD at the GBP/USD bid, then sell USD for CHF at the USD/CHF bid, to get the cross bid for CHF per GBP. Conversely, to obtain the cross offer, you buy GBP with CHF, which uses the GBP/USD ask and USD/CHF ask.

Option 1: 1.2302 - 1.2275
This would imply a bid of 1.2302 and an offer of 1.2275, which is inverted (bid higher than offer). In a normal two-way quotation, the bid should be lower than the offer. This option violates the basic pricing convention and is therefore inconsistent.

Option 2: 1.2305 - 1.2280
Here the bid is 1.2305 and the offer is 1.2280, again showing a bid higher than the offer. While the numbers are close to the computed cross, the structure is inverted (bid > offer). This makes the quotation implausible in typical FX cross quoting conventions.

Option 3: 1.2250 - 1.2270
This pair would place the bid at 1.2250 and the offer at 1.2270. The bid is lower than the offer, which is consistent, but these values are noticeably lower than the cross that results from multiplying the individual legs (needed cross would be around 1.2273 for the bid and around 1.2302 for the offer). The numbers deviate from the calculated cross, indicating this is not the correct implied cross.

Option 4: 1.2280 - 1.2305
This shows a bid of 1.2280 and an offer of 1.2305, which is a reasonable spread with bid < offer. However, the calculation using the legs (GBP/USD bid 1.3335 times USD/CHF bid 0.9205) gives about 1.2273 for the cross bid, not 1.2280; and the cross offer (GBP/USD ask 1.3350 times USD/CHF ask 0.9215) gives about 1.2302, not 1.2305. So while this option is close, the exact numbers do not align with the straight cross-multiplication results.

Option 5: 1.2275 - 1.2302
This option presents a plausible spread with bid 1.2275 and offer 1.2302. If we compute precisely: cross bid = GBP/USD bid (1.3335) × USD/CHF bid (0.9205) ≈ 1.2273, which rounds to 1.2273–1.2275 depending on rounding conventions; cross offer = GBP/USD ask (1.3350) × USD/CHF ask (0.9215) ≈ 1.2302, which matches the offered 1.2302. The pairing 1.2275 - 1.2302 sits neatly at the expected cross bid and cross offer after proper rounding, and the order (bid lower than offer) is correct for a two-way quote.

In summary, Option 1 and Option 2 violate the basic bid < offer convention, and Option 3 underestimates the cross bid while Option 4 is close but not exactly aligned with the precise product-based calculation. Option 5 aligns with the cross-rate calculation when multiplying the respective legs and applying standard rounding, yielding a consistent and conventional two-way cross quote.

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