In currency forwards, I understand that we think in terms of what we are doing with the base currency.
In the below example if it is delivery of GBP against CHF, my understanding is that we are receiving GBP from the dealer. Therefore as the base is GBP, we are buying GBP and the dealer is selling GBP so they would use the ask rate.
Also, we are moving down the quote, which means if the question didn’t already specify the bid rate, I would have gone for the ask rate.
Why is the correct rate for this transaction the bid rate?
You’re delivering GBP.
Think of Chinese take-away. (Or Thai, or Italian, or Mexican, or whatever your cuisine of choice.) The restaurant sells you the food, and they deliver it. You deliver things you sell, not things you buy.
In this example, the dealer is the price taker (which may be where your confusion comes from because a dealer can also be a market maker). The dealer wants to receive GBP / pay CHF in three months, so he is looking for a bid side rate i.e. the rate at which the market maker is willing to pay GBP against receiving CHF.
For example, the dealer may be an Asian Bank who only occasionally deals in GBP/CHF. He wants to get a trade done, and he is going to the market to get it done. He is willing to trade at a rate that is slightly below the market.
