Suppose the spot ask exchange rate,S^a($/£),is $1.90 = £1.00 and the spot bid exchange rate,S^b($/£),is $1.89 = £1.00.If you were to buy $10,000,000 worth of British pounds and then sell them five minutes later,how much of your $10,000,000 would be "eaten" by the bid-ask spread?

Question

Quizplus · Accepted Answer

The bid-ask spread is the difference between the spot ask and spot bid exchange rates. In this case, the bid-ask spread is:

$1.90 - $1.89 = $0.01

To calculate how much of the $10,000,000 would be eaten by the bid-ask spread, we need to calculate the percentage of the spread in relation to the amount of British pounds bought and sold:

Spread percentage = spread / spot bid exchange rate = $0.01 / $1.89 = 0.0053 or 0.53%

Now we can calculate how much of the $10,000,000 would be eaten by the spread:

Spread cost = spread percentage x transaction amount = 0.53% x $10,000,000 = $52,632

Therefore, the correct answer is D, $52,632.

Suppose the Spot Ask Exchange Rate,Sa($/£),is $1

Suppose the Spot Ask Exchange Rate,S^a($/£),is $1