The FX spread (foreign exchange spread) is the difference between the buying (bid) and selling (ask) price of a currency pair. It is usually measured in basis points (bps), where 1 basis point equals 0.01%.
How It Works
If a bank quotes USD/CAD at 1.3500 (bid) and 1.3510 (ask), the spread is 0.0010, or 10 basis points (bps). The spread represents the transaction cost and is how banks and brokers earn revenue from currency trading.
Why It Matters
- For traders: A smaller spread means lower costs when exchanging currencies.
- For institutions: Wider spreads often appear in less liquid markets or during volatile conditions.
Final Thoughts
Understanding FX spreads is essential for evaluating the cost of currency transactions. Even small differences in basis points can have a large impact on trading costs over time.