Thursday, November 22, 2007

Bid and Offer Rates

Banks typically quote bid and offer exchange rates. The 'bid rate' is the rate at which the price-maker is willing to buy the currency being priced. The 'offer rate' is the rate at which the price-maker is willing to sell the currency being priced.

For example, if a bank quotes AUD/USD as 0.5150/0.5155, its bid rate is 0.5150, and its offer rate is 0.5155. The difference between the bid rate and the offer rate (0.0005 in this example) is known as the 'bid-offer spread'.

The price-maker is willing to buy AUD at 0.5150 and is willing to sell AUD at 0.5155.

If a price-taker wishes to deal, it will have to deal at a price maker's rate. If the price-taker wishes to buy AUD from the price-maker, it will have to buy them at 0.5155. On the other hand, if the price-taker wishes to sell AUD to the price-maker - it will have to sell them at 0.5150.

If a price-maker is able to find people to buy at its offer rate and other people to sell the same amount at its bid rate, it would make a profit equal to the bid-offer spread. In practice this coincidence rarely occurs. Price-makers attempt to make money by moving their bid and offer rates up and down.

The offer price is the price at which the price maker is prepared to sell the base currency.

Two-way prices are quoted with the bid first, followed by the offer.

Learn how to read a Forex Quote
Understand what a spread is why it is so important

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sanya said...

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