Difficulty understand exchange rates

CFA Level II Economics
#1

Hi,

I’m having trouble understanding the “up the bid, down the ask” rule.

It seems intuitive at the base currency level, when I think of it similar to buying stocks, where to buy you pay the ask and to sell you sell at the bid price. Why is it the opposite for the price currency?

#2
  • so you are buying the currency - if the ask price comes “down” you are buying at a lower price.
  • if the bid price goes “up” - you are selling at a higher price

now does it make sense?

and if I am not mistaken this is from the point of view of the dealer in currencies.

#3

Ex.

There is a rate quoted in /€. So if you have and want to trade them for €, you are going from the numerator down to the denominator so you use the Ask. Likewise if you are starting with € and want to trade them for $ you are moving from denominator UP to the numerator so you use the Bid.

Simpler logic: Always pick the worst rate for the situation, because the problems are worked from a price taker`s perspective

#4

yes.

Forget the up the bid down the ass thing the only thing to remember is the international ripp off rule : when you buy you want to buy at the lowest rate but you end up paying the highest. When you sell you want to sell at the highest rate but end up sellling at the lower one…combine this with the direction of arbitrage and the rest is history