Exchange rates are commonly expressed as two rates, the bid price and the offer price, for example:

USD/AUD 1.1240-1.1245 or

USD/AUD 1.1240-45 or

USD/AUD 1.1240/45

Rates shown in the financial press are the average (mid-point) of the bid and offer rates.

• The bid price is the rate at which the bank quoting the price, the market marker will buy the base currency from a customer, the market user.

• The offer price is the rate at which the market maker will sell the base currency to a customer/market user.

This may be confusing initially, but you must know the rule thoroughly.

It may help you to think of the base currency as a commodity being traded. The market maker will want to buy the commodity (base currency) at the lowest price possible and sell the commodity (base currency) at the highest price possible.

Hence,

To avoid confusion, currency traders usually apply this rule and think in terms of base currency: ’buying Canadian dollars’ would automatically be translated in the dealers head to ‘selling US dollars’, since the US dollar/ Canadian dollar rate is quoted with the US dollar as base currency.

By market convention, the bid rate is quoted on the left hand rate and the offer rate is on the right hand side.

The market user (customer) whether a corporate customer, institutional investor, commercial bank, or central bank will always get the worst of the bargain. The market maker will always quote the price (bid rate or offer rate) that is most favourable to himself.

When a dealer receives a call from another bank for a price, he is acting as market maker. If he then calls another bank to close the position (i.e. to transact an opposite deal) he is acting as a market user, taking the price quoted to him.

Example

A multinational wants to buy USD 5 million in exchange for Singapore dollars. A bank quotes 1.3607-1.3615 for the USD/SGD rate.

The market maker is selling the base currency, dollars and so the rate to apply to the transaction is 1.3615, and the multinational will pay SGD 6.8075 million for the dollars (5 million x 1.3615)