How large are the bid–ask spreads in the interbank spot market? What is their purpose?
What will be an ideal response?
The purpose of the bid-ask spread is to allow traders to profit by buying a currency at a low bid price and selling that currency at a higher ask price. Bid–ask spreads in the spot foreign exchange market are quite small, often only two or three basis points. For example, a yen–dollar trader might quote a bid price of yen per dollar at which she is willing to buy dollars in exchange for yen of, say, ¥83.74/$. The trader would then quote a higher ask price at which she is willing to sell dollars for yen, say, at an exchange rate of ¥83.76/$. This percentage bid-ask spread is
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