INTERNATIONAL ECONOMICS

S. Y. B.Sc.; Symbiosis School of Economics Faculty: Sushma

Forex Trading Bid and Ask Prices and the Bid Ask Spread Exchange Rate The value of one currency expressed in terms of another. Currency Pair The two currencies that make up an exchange rate For example, USD/YEN is a currency pair. Base Currency For foreign exchange trading, currencies are quoted in terms of a currency pair. The first currency in the pair is the base currency. For example, in a USD/JPY currency pair, the US dollar is the base currency. Also may be referred to as the primary currency. Counter Currency The second currency in the pair Also known as the terms currency ISO Currency Code Three-letter alphabetic codes that represent the various currencies used throughout the world. ISO Currency Codes are specified by the International Organization for Standardization (ISO), which provides standards for businesses, governments and societies. ISO currency code standards are periodically updated and published. Examples of ISO currency codes include the three-letter codes for the Euro (EUR); U.S. dollar (USD); Pound Sterling (GBP); Japanese Yen (JPY); Australian Dollar (AUD); Swiss Franc (CHF); and New Zealand Dollar (NZD). These codes are used in foreign exchange markets USD = US Dollar EUR = Euro JPY = Japanese Yen GBP = British Pound CHF = Swiss Franc CAD = Canadian Dollar
Page 1 of 4

INTERNATIONAL ECONOMICS
S. Y. B.Sc.; Symbiosis School of Economics Faculty: Sushma

AUD = Australian Dollar NZD = New Zealand Dollar Cross pairs The currency pairs that do not involve the US dollar are called cross currency pairs, such as GBP/JPY. Pairs that involve the euro are often called euro crosses, such as EUR/GBP. The Majors The most traded pairs of currencies in the world are called the Majors. They constitute the largest share of the foreign exchange market. The Majors are: EUR/USD, USD/JPY, GBP/USD, AUD/USD, USD/CHF and USD/CAD. Nicknames In everyday foreign exchange market trading and news reporting, the currency pairs are often referred to by nicknames rather than their symbolic nomenclature. These are often reminiscent of national or geographic connotations. The GBP/USD pairing is known by traders as the cable, which has its origins from the time when a communications cable under the Atlantic Ocean synchronized the GBP/USD quote between the London and New York markets. The following nicknames are common: Fiber for EUR/USD, Chunnel for EUR/GBP, Loonie and The Funds for USD/CAD, Matie and Aussie for AUD/USD, Geppie for GBP/JPY and Kiwi for the New Zealand Dollar NZD/USD pairing. Market Maker A market maker provides pricing and liquidity for a particular currency pair and stands ready to buy or sell that currency at the quoted price. Pip Pip is the smallest price increment in the last digit in the rate usually the fourth digit after the decimal point 'Two-Way Quote' A type of quote that gives both the bid and the ask price of a currency Bid Price The Bid Price is displayed on the left and is the price at which you can sell the base currency.
Page 2 of 4

INTERNATIONAL ECONOMICS
S. Y. B.Sc.; Symbiosis School of Economics Faculty: Sushma

In other words, the bid price is the price at which the market maker (the actual entity that is on the other side of your trade) will buy and therefore the rate at which you the client can sell. It is also referred to as the market maker's bid price. For example, if the EUR/USD quotes 1.3200/03, you can sell 1 Euro at the bid price of US$1.3200. Ask Price/Offer Price The ask price is displayed on the right and is the price at which you can buy the base currency. It is also referred to as the market maker's ask or offer price. The ask price is the price at which a market maker will sell and therefore the rate at which you the client can buy. For example, if the EUR/USD quotes 1.3200/03, you can buy 1 Euro at the offer price of US$1.3203. Spread The difference between the bid and offer price. For example, if EUR/USD quotes read 1.3200/03, the spread is the difference between 1.3200 and 1.3203, or 3 pips. Dealers/Market makers buy at the bid price and sell at the ask price, profiting from the spread between the bid and ask prices: bid < ask. In a Nutshell The Bid Price is the price at which the forex market, represented by your broker/dealer, is prepared to buy a specific currency in a Foreign Exchange Contract or Cross Currency Contract. Dealing in currencies can be confusing at the start because you must always deal with a currency pair. The first currency in the pair is the "Base" currency. The second currency in the pair is labeled the "Counter" currency. The quotation of a currency pair usually consists of two prices. The "Bid", usually lower than the "Ask", is the price at which a market maker or a broker is willing to buy the base currency in exchange for the counter currency. Ask or Offer, usually higher than Bid, is the price at which a broker is willing to sell the base currency in exchange for the counter currency. If the Bid price for a EUR/USD pair is 1.2750 and the Offer price is 1.2752, the difference, 2 "pips" in forex trader slang, is referred to as the "spread". The quote is usually in the form of "1.2750/52" or even abbreviated to form "50/52". Most forex brokers derive their trading profits from the spread, so it is beneficial to review broker spreads before transacting trades. In this example you would pay $1.2752 to
Page 3 of 4

INTERNATIONAL ECONOMICS
S. Y. B.Sc.; Symbiosis School of Economics Faculty: Sushma

acquire one Euro.

Example: I am a resident of Australia. I wish to travel to America and visit New Yorks financial district. In order for me to pay for goods and services I need to exchange my Australian Dollars for American dollars. I take my Australian dollars down to my bank and on a large screen I read the exchange rate information. The rate I am interested in is shown below: BID ASK AUD/USD 0.8158 0.8168 I now hand over $AUD 3,000 and the teller consults the rate above and she would for every Australian dollar I give her give me back $USD 0.8158 which of course is $USD 2, 447.4. The bid price is the price the bank is willing to buy the currency for. If you wanted to sell one Australian dollar to the bank they would buy it to from you for $USD 0.8158. This is known as the bid price. The ask price is the price the bank is willing to sell the currency for. If you wanted to buy one Australian dollar from the bank you would need to give them $USD 0.8168. This is known as the ask price.

Page 4 of 4