Calculating Forex Spreads

Since investors exchange one currency to another in the foreign exchange market, it is only logical that the currencies are quoted in terms of their price in the other currency. As such, currencies are always quoted in pairs. For example, USD/CAD which means US Dollar-Canadian Dollar. The first currency is known as the base or primary currency while the second currency is called the counter or quote currency.

If it takes C$1.20 to buy US$1, the currency pair USD/CAD can be quoted as 1.2/1 or simply 1.2 where the US Dollar is the base currency while the Canadian Dollar is the counter currency.

Once you are familiar in quoting currencies in the foreign exchange market, it will be easier for you to calculate the forex spread. Forex quotes include both the bid and ask prices. The bid price pertains to the price at which the market maker will agree to buy the base currency in exchange for the counter currency. To the contrary, the ask price is the price at which the market maker will sell the base currency in exchange for the counter currency.

As discussed earlier, the spread is the difference between the two prices. If the bid price is 120.00 and the ask price is 120.05 in the USD/CAD currency pair, the spread is equivalent to 0.05, or $0.0005.