Question

A forex trader from Mumbai collects the below information regarding the exchange ratebetween INR and GBP

Bid Price: INR / GBP = 96.10
Ask Price: INR / GBP = 96.20
You are required to help him with the below questions he has:
(a) What is the direct exchange rate of INR-GBP for the trader?
(b) What is the indirect exchange rate of INR-GBP for the trader?
(c) What is a cross rate? If the bid and ask rate for EUR-USD are available as GBP 1.2100-1.3100/USD, what would be the bid-ask rates for INR/USD, using the crossrate method.

Answer 1

The direct exchange rate of INR-GBP for the trader is 96.10 INR to 1 GBP, while the indirect exchange rate is 1 GBP to 96.20 INR. A cross rate is an exchange rate calculated using a third currency. Using the cross rate method with the bid and ask rates for EUR-USD, the bid-ask rates for INR/USD would be 79.42 INR/USD and 73.51 INR/USD respectively.

Step-by-step explanation:

(a) The direct exchange rate of INR-GBP for the trader is 96.10 INR to 1 GBP. This means that for every 96.10 Indian Rupees, the trader can buy 1 British Pound.

(b) The indirect exchange rate of INR-GBP for the trader is 1 GBP to 96.20 INR. This means that for every 1 British Pound, the trader can sell it for 96.20 Indian Rupees.

(c) A cross rate is an exchange rate calculated between two currencies using a third currency. To calculate the bid-ask rates for INR/USD using the cross rate method, we need to use the bid and ask rates for EUR-USD. If the bid rate for EUR-USD is 1.2100 and the ask rate is 1.3100, we can calculate the bid-ask rates for INR/USD as follows:

For the bid rate: INR/USD = INR/GBP * GBP/EUR * EUR/USD = 96.10 * (1/1.2100) = 79.42 INR/USD

For the ask rate: INR/USD = INR/GBP * GBP/EUR * EUR/USD = 96.20 * (1/1.3100) = 73.51 INR/USD