The bid price as quoted by the market (exchange) is the price for that asset /option on asset, if any participant wants to buy. (‘Bid’ price of the exchange becomes the ‘ask’ price for the market participants)
The askprice as quoted by the market (exchange) is the price for that asset /option on asset, if any participant wants to sell. (‘Ask’ price of the exchange becomes the ‘bid’ price for the market participants)
The difference between the bid and the ask price is called the bid-ask spread.
7.9 Two way quotes:
In interbank market, currency prices are always quoted with two way price. In a two way quote, the prices quoted for buying is called bid price and the price quoted for selling is called as offer or ask price. Please note that these prices are always from the perspective of the market maker and not from the perspective of the price taker.
Example. Suppose a bank quotes USDINR spot price as 45.65/ 45.68 to a merchant.
In this quote, 45.65 is the bid price and 45.68 is the offer price or ask price.
Meaning: that the bank is willing to buy one unit of USD for a price of INR 45.65 and is willing to sell one unit of USD for INR 45.68.
Thus a merchant interested to buy one unit of USD will get it for a price of INR 45.68 i.e. the price at which bank is willing to sell.
The difference between bid and offer price is called as “spread”.
Please note that the price quoted by a market maker is valid for certain quantity of the currency pair and it may vary if the amount for which quote is sought ishigher.
Spread is an important parameter to note while assessing market liquidity, efficiency of market maker and market direction. Clearly, a narrow spread indicates a higher liquidity and higher efficiency of the market maker. In USDINR spot market, the spreads are wide at the time of opening and gradually start narrowing as the market discovers the price. Similarly, for a USD 150 mn transaction the spread is likely to be higher when compared to the spread for USD 1 mn transaction.