Direct answer
A worked example of pair spreads shows how the quoted spread for a currency pair is computed (and how it can translate into an “effective” cost) under explicit assumptions. The key idea is simple: a currency pair quote usually includes a bid price and an ask price, and the pair spread is the difference between them.
Mechanism and definition (how the calculation works)
A currency pair spread is the difference between the ask (the price you pay to buy) and the bid (the price you receive to sell), for the same pair at the same time.
- Let Bid be the selling price for the pair.
- Let Ask be the buying price for the pair.
- Pair spread (in price terms) = Ask − Bid.
Sometimes people also discuss spread in pip terms (a pip is a standard unit used to express small price moves in many forex quotes). To keep the worked example verifiable without needing live market data, we will assume a pip size and show conversions explicitly.
Example assumptions for measurability
To make this a “worked example,” we must state assumptions:
- We pick a single moment in time (no changing quotes during the calculation).
- We choose numerical Bid and Ask values.
- We define pip size (the number of decimal places that equals one pip).
- We assume a “mid-price” for comparison only: Mid = (Bid + Ask) / 2.
- We include a simple way to model an extra execution cost beyond the displayed spread (to illustrate limitations), while still keeping all numbers explicit.
Evidence or example (fully numerical scenario)
Assume the following at one time point for a hypothetical pair:
- Bid = 1.2000
- Ask = 1.2006
- We assume pip size = 0.0001 (so 1 pip = 0.0001 in this example)
Step 1: Compute the pair spread in price terms
Spread = Ask − Bid = 1.2006 − 1.2000 = 0.0006.
Step 2: Convert spread to pips
Spread in pips = 0.0006 / 0.0001 = 6 pips.
Step 3: Compute the mid-price and relate spread to it
Mid = (Bid + Ask) / 2 = (1.2000 + 1.2006) / 2 = 1.2003.
Notice:
- Distance from Mid to Bid = 1.2003 − 1.2000 = 0.0003 = 3 pips.
- Distance from Ask to Mid = 1.2006 − 1.2003 = 0.0003 = 3 pips.
So, with symmetric quoting, the spread splits evenly around the mid-price: 6 pips total means 3 pips from mid to each side.
Step 4: Illustrate “effective spread” with an extra assumed cost
Displayed spread is not the only friction. To show how this affects outcomes without predicting them, add an explicit additional cost:
- Assume an extra fixed execution cost of 1 pip (e.g., modeled as a fee or slippage proxy).
Then an illustrative effective cost for entering and marking the position at the opposite side can be modeled as:
- Effective one-way cost = displayed spread/2 + extra cost.
- Displayed spread/2 = 6/2 = 3 pips.
- Effective one-way cost = 3 + 1 = 4 pips.
If you later “round-trip” (enter and exit), the total friction can be larger than the single quoted spread, depending on whether you pay both sides (buy then sell, or sell then buy) and how execution quality changes.
Limitations and risks (material failure modes)
A worked example can be correct while still being insufficient for real decisions, because pair spreads are influenced by changing conditions and how costs are realized.
- **Spread can change during execution. ** The calculation assumes Bid and Ask remain constant while you place and fill orders. In real markets, volatility and liquidity can widen spreads between quote time and fill time. 2. **Displayed spread may differ from effective cost. ** The example separates a “displayed” spread from an extra modeled execution cost. In practice, your effective spread can be affected by order type, speed, liquidity, and fee structures. 3. **Pip size conventions can differ. ** We assumed pip size = 0. 0001. If a pair or quote format uses a different tick/pip convention, the same Bid/Ask numbers convert differently into pips. 4. **Historical relationships do not guarantee future results. ** Even if a pair’s spreads were stable in the past, current liquidity conditions may not match. 5. **Correlation or “pair behavior” is not the same as spread.