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Learn Trading Basic || BID & ASK Price in Trading || with real life example

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engrsayful

In today's post I want to straightforward explain bid and ask with a mathematical problem so that you can easily understand how this two things works. I shall try to solve this problem in two method.  this is part one of the post here I am going to explain a way to solve the problem like to understand the bid ask of any trading.  and in second post I shall try to explain the same things with Different techniques so that you can have both the ideas to solve such kind of problems.

 

For example an importer from Bangladesh would like to import some product from China.  he need 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 hi need to  you spend to pay a the 1,000 Yuan?

 

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Let me explain the terms used in this problem first.  here ear the important need to pay the cost of the imported goods in Chinese currency (Yuan). As he is in from Bangladesh, he has Bangladeshi taka at his hand. as there is no direct trading of Bangladeshi taka with Chinese currency then he need to to go for Cross straight first to convert it into US dollar then into Chinese currency.

 

The price you can see from the problem is bid price and ask price.  I have explained what these two price mean in my previous posts in leofinance. you can check those.

 

Keep in Mind

In Short, 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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First step, he gonna buy USD or Sell Tk, any any context you can think. Lets think to buy $, so ask $

 

Tk needed to get USD = Spot(tk/ask $)

Here, its 86.90

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Second Step, Now he is going to to sell this US dollar or in Reverse you can think he gonna Buy Yuan.let's consider buying Yuan.

So, Spot ($/ask Yuan)

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Finally amount in Tk needed to buy 1000 Yuan = 10,000 Yuan * (Tk/ask $) * ($/ask Yuan)

 

Here, the rate for ($/ask Yuan) is not given in the problem. So, we need to apply the condition here `Bid in one currency is ask on another` here.

 

Now,

10,000 Yuan * (Tk/ask $) * {1/(Yuan/bid $)}

= 10000 Yuan * 86.90 tk/$ * (1/6.50 Yuan/$)

= 1,33,692.31 

 

Tk Needed: 1,33,692.31 for paying 10,000 Yuan in Spot Market

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Finally as I have done it with mathematical equation you need to careful about placing a bid price and ask price in the equation. in the problem the first prize is bid price and second price is ask price. Again we know that ask price is greater than Bid price.

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Another important things anyone need to consider that is the unit should be eliminated otherwise you will not get a single unit.  in the  second last line of the mathematical problem you can see the dollar and Dollar are being eliminated because one is numerator and another one is denominator.

Similarly for Yuan as well. So, we left Tk only that is 1,33,692.11.

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I hope you have understand it better and still if you have any problem understanding the matter feel free to comment here.  thank you very much for stopping by

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About Myself in Brief

I am lecturer of Textile Engineering in Bangladesh. I like to share my opinion and ideas through blogging. I would like to share my learning so that anyone can be benefited from my effort. I blog on Textiles, Online Money Making, Agriculture, Technology and some Random topics. Capturing Nature and Playing Cricket is my hobby. I am always a learner and eager to learn from anyone.

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