FX beginner question
What does it mean when you say , "the bank's bid for EUR/USD is 1.2000, and their ask is 1.2002"?
Does it mean they are willing to pay 1.2 USD to buy 1EUR, but if you want to buy 1EUR from this bank, they ask you to pay them 1.2002?
Not sure about the direction, it's kind of confusing. For example, when you say that you are bidding EUR/USD, it means you want to buy EUR/USD, but what does it imply? You are exchanging what for what? Logically, it seems like you are exchanging EUR to USD, but then the above example doesn't make sense numerically.
Please someone clear this out for me.
In essence, the bank is buying Euro at 1.2000 and selling Euro at 1.2002.
There are well-defined conventions to be used. Check out Tim Weithers book Foreign Exchange.
I'm not sure of the conventions, but it works like this:
Bidding eur/usd pair = Buy Euro Sell Dollar.
Therefore in your example, buy 1 euro at 1.2 usd
Offering eur/usd = Sell Eur Buy Dollar
Sell euro at 1.2002 usd. (2 pip spread)
The value of a currency is relative to something else, therefore if you wanted to buy eur, you'd borrow usd, and buy eur using usd. That's where you can get positive carry too, say you borrowed usd at 1%, and you can earn 2% with eur, then the net effect is you earn 1%.
If you're bidding EURUSD, you are looking to buy euros sell dollars. If you're offering EURUSD you are looking to sell euros buy dollars. Can you be more clear about why that doesn't make sense numerically?
This answers my question. Thanks a lot.
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