How are foreign currencies quoted and priced?

Currencies are designated by three-letter symbols. The standard symbols for some of the most commonly traded currencies are:

EUR - Euro

USD - United States Dollar

CAD - Canadian Dollar

GBP - British Pound

JPY - Japanese Yen

AUD - Australian Dollar

CHF - Swiss Franc
NZD - Newzealand Dollar

Currency pairs are often quoted as bid-ask spreads. The first part of the quote is the amount of the quote currency you will receive in exchange for one unit of the base currency (the bid price). The second part of the quote is the amount of the quote currency you must spend for one unit of the base currency (the ask or offer price). For example, a EUR/USD spread of 1.4050/1.4055 means that you can sell one Euro for $1.4050 and buy one Euro for $1.4055. This spread could also be quoted as 1.4050/55.

At first glance, the bid and ask prices may seem backwards to you. That is because they are listed from the dealer’s point of view, not from your point of view. The first part of the spread, or the bid, is what the dealer is willing to pay to buy the base currency. So this is the price you will get if you SELL the base currency. In the same way, the second part of the spread, or the ask, is what the dealer is willing to sell the base currency at, so this is the price you will get if you BUY the base currency.

Example:

If the USD/CHF spread is listed as 0.9975/0.9980, you can sell one US dollar for 0.9975 Swiss francs and buy one US dollar for 0.9980 Swiss francs.

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Exercise . 1:

In this currency pair, which is the base currency?

AUD/USD

The answer is the Australian Dollar, or AUD. Remember, the first currency in a currency pair is the base currency and the second currency is the quote currency.

Exercise . 2:

Using this USD/JPY spread (114.45/114.55), how many Japanese yen would it take to buy one US dollar?

It would take 114.55 yen to purchase one US dollar.

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Who determines the execution price—the trader, the dealer or the exchange?

It is the dealer. Remember that the forex markets we are discussing have no central exchange on which the contracts are traded, and you as the trader have no control over the execution price.