TYPES OF SPOT RATES

Generally, in the spot exchange market, two types if spot rates may be quoted.

* Ask Price

* Bid Price

Ask Price:

The Ask price is the rate at which the foreign exchange dealer ‘asks’ its customers to pay in local currency in the local exchange of the foreign currency. In other words, ask price is the selling rate or the offer rate and refers to the rate at which the foreign currency can be purchased from the dealer.

Bid Price:

Bid Price is the rate at which the dealer is ready to buy the foreign currency in exchange for the domestic currency. So, the bid price is the rate which the dealer is ready to pay in domestic currency in exchange for the foreign currency and therefore, it is the buying rate. The dealer sells the foreign currency for more than what they are ready to pay for buying it. Normally, the direct ask price is greater than the direct bid price and the difference between the two is known as the ask-bid spread.

The ask-bid spread depends upon the breadth and depth of the market for that currency and the volatility of the currency. In case, when there is a large volume of transactions and the trading is continuous in any currency, the spread is small and may range between 0.1% to 0.5%. The spread is much higher for infrequently traded currencies. This spread compensates the dealer for holding the risky foreign currency and for providing the service of converting currencies. The bid spread is usually stated as a percentage cost of transacting in the foreign exchange market and may be computed as follows:

% Spread = ((Ask Price – Bid Price) / Ask Price) x 100

For example, if the ask price of $/£ is $1.6646 and the bid price is $1.6629, then the % spread may be ascertain as follows:

% Spread = ((1.6646 – 1.6629)/ 1.6646) x 100 = 0.1%