First the basics:

Bid rate: The rate at which the bank or dealer is willing to bid or buy the unit currency. For example, if a bank gives you a quote of 1.3450 AUD / USD means that the bank is willing to buy 1 American dollar from you and give 1.3450 Australian dollar in return.

Offer rate: The rate at which the bank or dealer is willing to offer or sell the unit currency. It is also called as ‘Ask’ rate. For example, if a bank gives you a quote of 1.3470 AUD / USD means that the bank is willing to sell 1 American dollar to you by taking 1.3470 Australian dollar in return.

Spread: Simply put, it is the difference between the offer and the bid rates. In short, the offer rate will always be higher than the bid rate in order for the bank to make profit. For example, If a bank gives you a quote of 1.3450-70 AUD / USD means that the bank is willing to buy 1 US dollar from you for 1.3450 AU dollar and sell 1 US dollar to you for 1.3470 AU dollar in return. The difference of 0.002AUD / USD is the bank’s profit margin or the spread.

Now let us understand spot, forward and cross rates:

Spot rate: It is an exchange rate (fixed or floating ) on the spot (at once or within two-business day). For example, 125 Yen / USD

Forward rate: It is an exchange rate (fixed or floating) at which a currency will be purchased or sold at a specific time in future. For example, 90-day forward rate is 137 Yen / USD

Cross rate: It is an exchange rate between two foreign currencies, both of which are expressed in terms of a third currency. For example, 125 Yen / USD and 1.5021 USD / GBP

Source by Anish Baheti