One of the calculations that is introduced in the Global Treasury Management section of the ETM 2nd Ed. (or Chapter 9, “Financial Risk Management” in the ETM 3rd Ed) covers how to perform US dollar/foreign currency conversions. Obviously, it is important to know how to do this calculation in case you get it as an exam question. But, the exam question could also be designed to additionally test your understanding of the Bid-Offer Spread concept and how it is used when working with FX dealers. It is important to understand this so you can determine which FX rate is required to calculate the correct answer for this type of exam question.

An example of a FX dealer Bid-Offer Spread is as follows:

EUR 1.2510 - 1.2530/$

Where the first FX rate is the BID rate which means that it is the rate at which the FX dealer will BUY your US dollars. The second rate is the OFFER rate and is the rate at which the FX dealer will SELL you US dollars.

Here are some guidelines you can use to solve FX conversion calculations where a FX dealer Bid-Offer Spread is incorporated in the exam question:

1) Always assume that you are in the role of the US treasury manager who is working with a FX dealer to either buy or sell US dollars.

2) Exchanging US dollars for foreign currency

In this case, you are SELLING US dollars and the FX dealer is BUYING US dollars from you at the BID rate. Or simply stated:

US Dollars----à FX = BID Rate

3) Exchanging foreign currency for US dollars

In this case, you are BUYING US dollars and the FX dealer is SELLING you US dollars at the OFFER rate. Or simply stated:

FX--------à US dollars = OFFER rate

-George Schilling, CTP