Question

Hamburg Bank's quoted bid price for the British Pound (£) in dollars is $1.25/£ and its ask price is $1.30/£. What bid and ask prices would you expect the bank to quote for the dollar in terms of pounds (i.e., £/$)?

Round your final answers to four decimal places.
A. Bid: £0.7800/$ | Ask: £0.8000
B. Bid: £0.7692/$ | Ask: £0.8000/$
C. Bid: £0.8000/$ | Ask: £0.7692/$
D. Bid: £0.8000/$ | Ask: £0.78000

Answer 1

To find the bid and ask prices for the dollar in terms of British pounds, you invert the original bid and ask prices for the pound in terms of dollars. The bid price for the dollar would be £0.7692, and the ask price would be £0.8000.

Step-by-step explanation:

Hamburg Bank's quoted bid price for the British Pound (£) in dollars is $1.25/£ and its ask price is $1.30/£. To find the bid and ask prices the bank would quote for the dollar in terms of pounds (£/$), we need to invert these prices.

The bid price is the price at which the bank is willing to buy the foreign currency, and the ask price is the price at which the bank will sell the currency. To get the new bid price for the dollar, we take 1 divided by the ask price of the pound, and to get the new ask price, we take 1 divided by the bid price.

So for the dollar's bid price in terms of the pound, it would be 1 / $1.30 = £0.7692 and for the ask price, it would be 1 / $1.25 = £0.8000. Thus the bank would quote:
Bid: £0.7692/$ | Ask: £0.8000/$