i. Bid rate the price at which people are willing to buy the currency pair.
ii. Ask rate is the price at which people are willing to sell the currency pair.
Bid and Ask rate
The bid rate represents the price that a dealer or the broker is willing to pay for a currency and the ask rate is the price at which the dealer will sell the same currency.
To understand this, lets take an example. Let us suppose, you live in India and you are traveling to the USA and for that, you have to exchange your INR to USD.
Let's say USD is the base currency of your broker. So, when you went to exchange your INR for USD, the broker will offer you a rate to buy your INR and give you USD.
This rate which the broker offers you, to buy your INR is called the ask rate.
Now, let us say after few days you came back from the USA and had few dollars left with you. To exchange that dollar for INR you went to broker again.
Now this time, the broker will give you a rate at which he is willing to buy your USD and give you INR. This rate is called a bid rate.
Why is the ask rate higher than the bid rate?
Always remember that in the forex market, or normal exchange market, the ask rate will always be more than the bid rate.
That is, the broker will sell his base currency for more value and will always offer less rate for buying the same base currency.
The main purpose behind this is that broker earns money through this process.
The difference between the asking price and bid price is the profit that the broker makes. And this difference is called a spread.
Who benefits from the bid and ask rates?
The bid rate and ask rate benefits the broker or the market maker.
And this is because of the spread they charge in currency pairs.