Nikki just landed in London with AUD 3000 for a 4-week holiday. She needs to exchange her Australian dollars for British pounds to use during her holiday. The rate advertised by a local foreign exchange dealer is

GBP 1= AUD 1.7445-1.7450

5a) What are the commodity currency and term currency in the advertised quote? Is it a direct quotation or an indirect quotation? What is the bid-offer spread for the local dealer?

5b) What is the rate at which she can convert Australian dollars into the British pound? Explain why?

5c)How many British pounds will Nikki receive, given the answer to part b)?

5d) At the end of her holiday, she has GBP 200 left and wants to convert it back to Australian dollars. If the Reserve Bank of Australia increased its cash rate by 25 basis points during her holiday, holding other factors constant, which of the following quotations will likely be in the market? Briefly explain why

• GBP 1= AUD 1.7435-1.7440
• GBP 1= AUD 1.7455-1.7460

5e) Is the movement of the exchange rate in the market an upside or a downside risk for Nikki? Explain briefly.

5f) Given the answer to part d), calculate how many Australian dollars Nikki will be able to receive.