FOR FORWARD EXCHANGE RATE, WHICH ONE IS THE BID AND WHICH ONE IS THE ASK? WHEN CONVERTED , BID BECOME “ASK” AND VS.
THANKS
Assume that the EUR:USD six-month forward exchange rate is quoted at 1.2102 − 1.2112. What is the bid-ask spread as a percentage of the ask price based on a direct quote for euros?
A) 0.0847%. B) 0.0858%. C) 0.0816%.
Your answer: C was incorrect. The correct answer was A) 0.0847%.
Our quote is in terms of the number of dollars per euro, and a direct quote for euros is the number of euros per dollar. So, we must invert the rates given to get USD:EUR = 0.8256 − 0.8263. The spread is the difference between the bid and the ask or 0.8263 − 0.8256 = 0.0007. The spread as a percent of the ask price is (0.0007 / 0.8263) or 0.0847%. Rounding is per market convention.
The bid is always advantageous to the buyer, and the ask is always advantageous to the seller. This typically implies that the bid is the lower amount and the ask is the higher amount (unless you want less of something as the buyer, which isn’t common).
The EUR:USD bid is 1.2102 and the ask is 1.2112 because the buyer (bidder) is willing to pay a lower number of dollars for a euro than the seller is willing to sell for.
When you make the conversion, you’re now talking about buying dollars with euros. Here, the buyer wants to pay 0.8256 euros for one dollar (the bid) but the seller wants at least 0.8263 euros to sell his dollar.
Just to stress this again: The “bid” refers to the better position for the buyer for any given transaction. It’s not so much that the bid becomes the ask after conversion. Instead, think of them as two different transactions (because they are). The bid is the lower value in both cases because it means the buyer pays the lower price. The bid cannot exceed the ask, because that would mean the transaction would have gone through – the buyer is willing to pay more than what the seller is asking.