In the foreign exchange market any currency
rate is always quoted as a two-way price. For example, a dealer might quote a customer
$/DM as 1.7515 to 1.7520. This means that the customer can buy dollars at 1.7520 and sell
dollars at 1.7515.The dealer makes his profit by quoting a slightly higher price
at which customers can buy and a slightly lower price at which customers can sell. The
difference between the two prices is the dealing spread.
The size of the dealing spread varies according to the size and type of transaction.
In the interbank market, the spread on a ten million dollar transaction would often be
three pips (e.g. 1.7449 - 1.7452). At the opposite extreme, a retail customer dealing in
very small amounts with his bank might well pay a spread of 200 pips (e.g. 1.7350 -
1.7550) or more.
Generally, the narrowest dealing spreads are charged when one of the major trading
currencies, such as the yen or Deutschemark, is quoted against the dollar.
Wider spreads are usually quoted for less frequently traded currencies, for example
the Italian lira or Swedish krone, against the dollar.
Quoted spreads will usually be wider again for crossrate quotations between two less
commonly traded currencies, for example the Japanese yen against the Italian lira.
At IG Index, the dealing spread you pay depends on the size and type of transactions
you make. The dealing spreads you will be quoted in normal conditions will be agreed at
the time you open an account. Our dealing spreads may be increased without notice,
especially in unusual or volatile market conditions.
To work out the cost in money terms of the dealing spread which is being quoted,
multiply the transaction size by the number of pips of spread. This will give you the cost
in terms of the second-named currency.
Example
You are quoted a 5-pip spread in $/DM for a $500,000 transaction.
The cost of one pip is:
500,000 x 0.0001 = DM 50
So the value of the 5 pip spread is:
DM 50 x 5 = DM250
