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What is Bid, Ask & Spread in Forex Market

Updated: Jan 3


While dealing with foreign exchange in reality or practical aspect, a person would come across two prices- Bid and Ask Price.

Bid Price is the price at which banks buy one currency in exchange of another currency and Ask price is the price at which banks sell one currency in exchange of another currency.


Example:

If you are going for foreign vacation and you want to buy dollar while going for the trip and Rupee to US Dollar exchange Rate is 82.70/83.15,

The Bank will Buy Rupee from you at Rs.83.15 for each US Dollar. This is Ask price at which the bank is willing to buy the currency (Rupee) from you.

Now when you come back from foreign trip and you are left with 100 US Dollars and want to sell this left out dollars than;

The Bid price is the price at which the bank is willing to buy the US Dollar to you. In this case, the Bid price is Rs. 82.70 that you will get for each dollar


Spread is the difference between bid and ask price. In the above example, spread is 0.45 Rs (83.15- 82.70 Rs). Higher spread means higher profits for dealers.


Concept of Bid – Ask - Spread

It is vital to remember the bid price (buying price) of bank for one currency is the ask price (selling price) for the person for the same currency and the ask price (selling price) of one currency for banks is the bid price (buying) price for the person for the same currency.

The dealer earns profit through spread and volatility management. Spread and Volatility management refers to managing the variation in prices over time in forex market. Forex market is prone to variations and fluctuations due to multiple factors such as economic growth of countries, geopolitical factors and market sentiment. Along with this, continuous flow of orders for buying and selling is another requirement for profit making by dealer. In absence of continuous order flow, dealer can suffer significant losses. Additionally, dealer aims to attracting sellers when the market is on an upward trend by widening the spread which increases the profit for dealer and attracting buyers when the market is on downward trend by reducing the spread which lowers the cost of buying for buyers.


Forex dealer charges fee such as transaction fee, ATM fee, wire transfer fee, account maintenance fee, cross currency conversion fee. Different banks who deal in foreign exchange charges differently for foreign transaction so one needs to check for specific bank charges. These charges can be checked or known by checking on their websites or contacting the branch. These charges are crucial to check along with the fee schedule and other terms and conditions. Also, fee structures may change over time hence periodic check is necessary. In addition to that comparing different banks on the basis of fee and terms and conditions is advisable to ensure that most effective option is chosen for dealing in foreign exchange.

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