Question : What is the term used to describe the difference between the buying and selling price of a currency in the foreign exchange market?
Option 1: Exchange rate spread
Option 2: Exchange rate volatility
Option 3: Exchange rate risk
Option 4: Exchange rate peg
Correct Answer: Exchange rate spread
Solution : The correct answer is a) Exchange rate spread
The term used to describe the difference between the buying and selling price of a currency in the foreign exchange market is the exchange rate spread. Also known as the bid-ask spread, it represents the gap or margin between the price at which market participants can buy a currency (the ask price) and the price at which they can sell it (the bid price).
The bid-ask spread is influenced by various factors, including market liquidity, transaction costs, and market participants' supply and demand dynamics. Typically, market makers, such as banks and currency dealers, offer a higher buying price (ask price) and a lower selling price (bid price) to generate profits from the spread.
The exchange rate spread is an important consideration for participants in the foreign exchange market, as it affects the cost of trading currencies. A narrower spread indicates lower transaction costs, while a wider spread can increase the cost of buying or selling currencies.
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