Understanding Foreign Exchange - Part - 2



-series of articles on foreign exchange-

My last article was about quoting of foreign exchanges in different ways. This article is the continuation of the last one. Quoting of one currency against another is not done at same rate for buying and selling. A dollar cannot be both bought and sold for same amount of rupees at any point of time.

                                                     1$ = 47.5 – 47.75

The above is a direct quote in terms of Indian rupees. Now we have to understand this quote. Always there are two rates in the foreign exchange market. They are bid rate or buying rate and ask rate or selling rate. In any quote the smaller amount at the left side is called bid rate and the larger one at the right side is called the ask rate. In the given quote,

Bid rate = 47.5, Ask rate = 47.75.

Bid rate is the rate at which a bank buys a currency, whereas ask rate is the rate at which it sells the currency. RBI buys an USD by giving INR.47.5 and sells an USD for INR 47.75.

Why there are two rates? The answer is, RBI which maintains the forex market and performs all other functions for stabilizing the currency movements, needs a return. The difference between the buying rate and selling rate is the benefit for RBI.

Let us now understand the mechanism of bid and ask rates. Bid rate is the rate at which bank buys a currency and ask rate the vice versa. This is exactly the opposite in the market. Bid rate is the rate at which a person can sell a currency to the bank and ask rate is the rate at which a person can buy currency from the bank.

The action is simple,

Bank can buy only when someone sells to the bank  -  BID RATE.

Bank can sell only when someone buys from the bank  -  ASK RATE.

So, we can buy one dollar by giving INR 47.75 and sell a dollar and get INR 47.5.

Individual

Bank

Rate

Amount

Buys

Sells

Ask Rate

47.75

Sells

Buys

Bid Rate

47.5

 

The difference between Bid rate and Ask rate is called as Spread. Therefore it is the benefit that accrues to the bank.

In this type of two way quoting, direct quote can be converted into indirect quote by the following formula,

Price/ Product = INR/$ = 47.5 – 47.75 – Direct Quote    Spread = 47.75 – 47.5 = 0.25

For converting the formula is,

Bid rate = 1/ ask rate.

Ask rate = 1/ Bid rate.

So, $/INR = 1/47.75 – 1/47.5

       $/INR = 0.0209 – 0.0210  - Indirect quote.

 

So, that about Bid and ask rate, spread and how to convert direct quote into indirect quote by using bid and ask rate.

D.Aravind (SRO 0266513)




About the Author

CA

I am from Madurai...I have cleared CA Final.... my mail id is 5aravind @ in.com, aravindkrishnaca @ gmail.com.........

Comments :

Related Articles


Loading


Popular Articles





CCI Pro

CCI Articles

submit article


Company
ARTICLESHIP 30 September 2026
CA Article Assistant

CA Suraj Garg & Associates

New Delhi

CA Final

View Details
Company
15 October 2026
Senior Accountant

Continental Belting Pvt Ltd

Mumbai

B.Com

View Details
Company
30 September 2026
Senior Accountant

Codeboard Technology

Chennai

B.Com

View Details
Company
ARTICLESHIP 17 October 2026
Articled Assistant

RRPM & Associates LLP

Chennai

CA Inter

View Details
Company
ARTICLESHIP 20 October 2026
CA ARTICLE

AMKN & CO

Noida

CA Inter

View Details
Company
Featured ARTICLESHIP 06 October 2026
Semi Qualified

AJAY SINGH AND CO LLP

Thane

CA Final

View Details
Company
06 October 2026
Assistant Manager - Audit and Compliance

Ravi K Jain & Co

Noida

Others

View Details
Company
14 October 2026
GST & TDS ASSISTANT

AGGARWAL SANJAY & ASSOCIATES

New Delhi

B.Com

View Details