A Brazilian firm needs to purchase US$400,000. It gets a quote from Unibanco Bank with USDBRL (BRL/$) at 1.4015 - 1.4037. Bank also imposes a commission of Brazilian real (BRL) 200 on each transaction.

Since buying $1 costs the firm R$1.4037, company pays = 400,000*1.4037+200=BRL 561,680

With the mid-point quotation (bank buys & sells at the same price), firm pays = 400,000*[(1.4015+1.4037)/2]=561040

Transaction costs = 561,680 - 561,040 = BRL 640. In percentage: 640/561,040 = 0.114%

In this case, why do we figure out the transaction cost by using the ask price minus mid-point instead of ask price minus bid price?

Answer rating: 100% (QA)

In the given scenario the transaction cost is calculated by subtracting the midpoint price from the ... View the full answer