shutterstock_454969468

Are you aware of Forex transaction costs? Do you know how your Forex transactions are priced? In this context, one should understand the unique concepts of Forex market. Newcomers may have heard about no exchange fees or no commissions. This sounds really satisfying to every new trader. However, one should know about fees that are structured on the basis of various concepts or deals that are taken by the Forex brokers.

Forex transaction costs:

To put some light on the concept of transaction costs, one should understand two things:

  • Dual Price Quotes

  • Spreads

Dual Prices:

This is the common investment of money that is linked to buying or selling of securities. For example, when traders are supposed to buy a currency pair at 1.5010, then it will be his/ her first investment, and transaction cost will be observed in next trade. In the same way, when traders sell a currency pair at 1.5050, then it will become the second transaction cost.

Spread:

A spread can be defined as the difference between the bid and ask price of any security. To understand the concepts of spread, one should know that spread is influenced by several factors. Some of the factors include:

  • Supply

  • Demand

In this content, brokers charge different traders in two different ways. It can be charges as fixed spread or variable spread. In variable spread option, brokers will charge on the currency pair that is depending upon the market’s volatility level. In this case, it might reach at least 1.5 pips to a maximum possible of 5pips.

The term spread can be used in five different ways to evaluate Forex transaction costs:

  1. Bid-Ask Spread

It helps in the measurement of the size of transaction cost of the security. Bid-ask spread is the difference between immediate order and immediate sale.

  1. Spread Trade:

As the trading is done with futures or options contracts, the trades will execute to produce overall net trade. Spread trade is defined as the action of buying one security to sell another security as a single unit. This is the reason it is also called relative trade.

  1. Yield Spread:

This shows the difference between two different investments for quoted rate of return. This is the reason it is also known as a credit spread. Some of the Forex market analysts term Yield Spread as ‘Yield Spread of X over Y’.

  1. Option-adjusted Spread:

For MBS (mortgage-backed securities) and options, it is termed as an adjustment in the yield spread with the addition of yield curve. This adjustment of the price is termed as an option-adjusted spread.

  1. Z-Spread:

It is also known as zero-volatility spread or yield curve spread. It is used for CDS (Credit Default Swaps and MBS.

Final note:

All the above spread types are offered to every newcomer. To get the best possible deal for Forex transaction costs, you have to choose a spread type. Thus, it is essential to choose right Forex broker who is reliable and has some reputation in the market.

 

Prev Next