A bid is the price in one currency at which a dealer will buy another currency. An ask is the price at which a dealer will sell the other currency
Dealers bid (buy) at one price and ask (sell) at a slightly higher price, making their profit from the spread between the prices. List and explain three reasons/factors that could make the spread small.
What will be an ideal response?
Answer: The bid-ask spread may be quite large for currencies that are traded infrequently, in small volumes, or both. The spread in wholesale transactions between banks and large corporations is normally smaller than in the retail market. Competition among dealers worldwide narrows the spread between bids and offers and so contributes to making the foreign exchange market "efficient" in the same sense as are securities markets. Other factors that affect the spread are the cost of processing orders, the cost of maintaining an inventory of a particular currency, and the volatility in the value of a currency.
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