Question

Explain how banks/foreign exchange dealers make money off the bid-ask spread, and why you can have two rate quotes on any currency.

Answer 1

First you have to know what is spread . A spread is a difference between the offer/sale/bid rate and the ask/buy rate. While the difference between the bid and ask rate is very low means the spread is only of few cents.

The banks/foreign exchange dealers can make money or profit by the spread of thousand of transaction daily. Banks / foreign exchange dealers will charge a commision per trade or a spread that helps to make money to them .The bid price or the selling price is always high and the ask price or buying price is always low . They sell the currency at high price and buy them at low price that helps them to make money.

We always have a two rate quotes of every currency one is direct quote and second is indirect quote. There is always a two rate quotes due to the bank or foreign exchange dealers. The quoted rates will have to make a allowance or profit or dealers margin. it is just for the benefits of the intermediatories or dealers.