In some of my previous post related to trading topic , I have explained the bid and ask price from real life example. There I have used mathematical technique to find out the amount of money needed for getting any specific cross currency in spot rate considering bid and ask price of both. In today’s post I shall share similar kind of problem but this time with another approach to solve the problem to understand better about trading and bid, ask price. I shall use practical thinking approach to know better the bid, ask in trading rather mathematical formula point of view. Hope by combining both the posts, you will have some better idea about these two prices in trading from real life example.
Previous example
An importer from Bangladesh would like to import some product from China. he needs to pay 10,000 Yuan. The price available at his hand are following-
Tk/$ 85.51 / 86.90 and
Yuan/$ 6.50 / 7.02
So, let's calculate how much amount of Taka he needs to you spend to pay the 1,000 Yuan?
Let me explain the terms used in this problem first. Here the important need to pay the cost of the imported goods in Chinese currency, RMB (Yuan). As he is from Bangladesh, he has Bangladeshi taka (BDT) at his hand. As there is no direct trading of Bangladeshi taka with Chinese currency then he needs to go for Cross trading through USD.
The price you can see from the problem is bid price and ask price.
In Short Keep in Mind
Bid = Bank’s buying rate or sellers selling rate
Ask = Bank’s selling rate or buyers buying rate
Bid in one currency is ask on another.
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Let’s solve with thinking approach
Solving through YUAN buying
| Step One | Step Two |
|---|---|
| Buy 10,000 Yuan so ask Yuan at ask rate on Spot (S). So, 10,000 Yuan * Spot($/ask Yuan). In question, Yuan/bid $ is 6.50, hence $/ ask Yuan = (1/6.50). And that is: 0.153846. So, in the solution: 10,000 Yuan * 0.153846 $/Yuan = 1538.46 $ is needed to buy that 10,000 Yuan. | Now, time of buying this USD with TK. Buying of USD, so ask USD for TK. Similarly here, 1538.46 $ * Spot(Tk/ask USD). In question, Tk/ask $ price is 86.90. So, in the solution: 1538.46 $ * 86.90 Tk/$ = 133692.17 Tk is needed to buy that 1538.46 $. So final Result is 133692.17 Tk needed for 10,000 Yuan buying in spot |
Solving with reverse approach as well for better understanding of newbies
| Step One | Step Two |
|---|---|
| Sell x amount of Tk for USD on Spot. So, x TK * Spot($/bid TK). In question, Tk/ask $ is 86.90, hence $/ bid TK = (1/86.90). And that is: 0.01150747. So, in the solution: x Tk * 0.01150747 $/tk = 0.01150747x $ will get by selling x tk. | Now, time of buying yuan or in reverse selling $. Let’s Consider Selling of USD for Yuan. In question, Yuan/ bid $ is 6.50. So, in the solution: 0.01150747x $. * 6.50 yuan/$ = 0.0747986191x Yuan. 10,000 Yuan = equivalent 0.0747986191x Yuan. Here x is tk. So, Tk needed = 10,000/0.0747986191 = 133,692.31. **So 133692.31 Tk needed for 10,000 Yuan buying in spot |
Keep in mind:
Bid price is lower than ask price (First one is Bid Price and second one is ask price)
In solution, you must eliminate any sing of currency by numerator and denominator.
I hope with these two posts now it should be clear to the newbies about these two prices (Bid and Ask in Trading). Check my previous posts to have better explanation of basic of these two prices. I have tried to explain from different angles so that it may understandable better to the newbies. If still you have any question, feel free to ask in the comment. Thank you.
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