[ELI5] Why is the exchange rate between two currencies not the same going both ways? Like why is the exchange rate of USD to GBP different from GBP to USD
In: Economics
You didn’t explain the context so there might be different explanations:
1) If you are in a bank or at a money changer, then the spread accounts for their expenses and profit. Say the “true” exchange rate is 1 GBP : 2 USD. If you have 1 GBP, the bank or exchange will probably only give you something like 1.95 USD – that 0.05 difference is their charge for the service. If you have 2 USD, you will get less than 1GBP – again for the same reasons.
2) In a Forex market, (and most markets of this type) the market will have an open order book. This will have the list of offers to buy from different people and a list of orders to sell again from different people. If the offer to buy matches the offer to sell (ie they agree on a price) then the exchange occurs. Naturally this happens very fast so what is mostly seen is the “gap” between the current open orders aka as the “bid ask” spread. This represents (for that instant in time) the lowest price someone is willing to sell and the highest price someone is willing to buy.
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