Bank OTC Rates
How do you determine the price of a specific foreign exchange rate? First, when demand meets supply, and a sale is done. That is where price on screen is determined.
In the figure above, it is the Bid and Offer price made by Bank of China, the exchange rates provided are all based on RMB. So we say RMB is the base currency, and we call the currency valuing against the RMB, e.g. the USD the quote-currency.
Here’s an example on how to use the quote board above: 100 Hong Kong Dollars for example has to be bought with ￥89.65 (CNY or RMB). Through the above direct pricing method, the domestic currency is expressed in exchange for a specified number of a foreign currency.
At present, this is a standard bank pricing method to define the exchange value of a specific currency.
Another method of reading exchange rate is the quote board pricing method, which is used by professional traders. The price quote expressed are mostly expressed based on US$1. There are main currencies where it is mainly priced against USD, and they are the Great Britain Pound (GBP), Japanese Yen (JPY), Euros (EUR), Australian Dollar (AUD), New Zealand Dollar (NZD), Swiss Francs (CHF).
Reason the US Dollar pricing method is used is because US dollar is widely used as a benchmark currency for banking and trading (import/export/services) for most countries.
Calculation method of US dollar price method:
For example, GBP/USD= 1.29364 this is expressed as £1 = US$1.29364
This is a standard way of reading exchange rate. When we buy and sell currencies, the price between the buy and sell price is called a ‘spread’. Can you manage to differentiate the difference in the spread by looking at the bank’s quote board and the broker/dealer’s quote board? If you can spot the differences, then you have just managed to differentiate the differences in spread when you go to a bank to make telegraphic transfer transactions, and how a broker/dealer make their profits when they offer leveraged forex exchange trading to their clients. One major source of profit made by both institutions is the spread.
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