You quote a customer spot AUD/USD at 1.0350-55. The T/N swap is quoted to you at 3/2. The customer asks to buy USD for value tomorrow. What rate should you quote him to break-even against the other rates?
A) 1.0352
B) 1.0353
C) 1.0347
D) 1.0348

Question

Quizplus · Accepted Answer

In this scenario, the customer is buying USD for value tomorrow. This means that the customer is going long on USD and short on AUD. To calculate the break-even rate, we need to take into account the spot rate, the T/N swap, and the interest rate differential between the two currencies.

First, let's calculate the outright rate for USD/AUD for value tomorrow. We take the bid price of AUD/USD (1.0350) and flip it to get the ask price for USD/AUD (1/1.0350 = 0.9662). Then, we add the T/N swap, which is quoted as 3/2. Since the customer is buying USD, we add the T/N swap to the USD side of the quote to get 0.9662 + 0.0003 = 0.9665.

Next, we need to factor in the interest rate differential. Let's assume that the interest rate in the US is 2% and the interest rate in Australia is 1%. Since the customer is buying USD, we need to convert the Australian interest rate to USD by dividing it by the spot rate: 1%/1.0350 = 0.965%. The interest rate differential is then 2% - 0.965% = 1.035%.

To calculate the break-even rate, we need to add the interest rate differential to the outright rate we calculated earlier: 0.9665 + 1.035% = 0.9766. Finally, we flip this rate to get the bid price for AUD/USD, which is the rate we should quote the customer: 1/0.9766 = 1.0238 or rounded up to four decimal places, 1.0352. Therefore, the best choice is A) 1.0352.

You Quote a Customer Spot AUD/USD at 1