FOREIGN EXCHANGE ILLUSTRATION:
BASE AND QUOTE CURRENCIES,
BID AND ASK PRICES
The following two illustrations are designed to help you understanding the concepts of base and quote currencies and bid and ask prices.
It is essential that when you look the ISO quote sequence that you first distinguish the base and the quote currency. This will be determined by the ISO sequence, with the base currency appearing first and the quote currency second.
Regardless of the ISO sequence, the first number in the sequence is always the market marker’s bid quote and the second number in the sequence is always the market maker’s ask quote. Note that market makers are large global banks.
When you view the market maker quotes, you must also realize that the market maker’s bid is their price to buy 1 unit of the base currency and the ask price is their price to sell 1 unit of the base currency. In either case, the market maker is buying or selling the 1 unit of the base currency against (or in terms of) the quote currency. The prices the market maker quotes are firm prices in that the market maker is committed to buying or selling at these prices (or at least until they change their bid and ask prices).
As someone (e.g., a non-market maker such as a multinational firm) dealing with a market maker bank you must therefore understand the quotes first from the market maker’s standpoint. Obviously, as someone dealing with a market maker, you ultimately need to consider what these quotes mean for you and your organization.
The following two illustrations will provide you with a way of thinking about both sides of a foreign exchange quote; that is from the market maker’s standpoint and from a non-market maker’s standpoint. The first example (EUR/USD) is where the dollar is the quote currency (the euro the base currency) and the second example (USD/JPY) is where the dollar is the base currency (and the yen is the quote currency).
Note how in both examples the positive spread between the market maker’s ask and bid quote is really the profit that the market maker receives from doing both sides of a transaction. In both illustrations, the ask price is higher than the bid price. This will always be the case in a currency quote from a market maker.
EXAMPLE #1
EUR/USD 1.2500/1.3000
EUR = BASE CURRENCY
USD = QUOTE CURRENCY
$1.2500 = MARKET MAKER’S BID QUOTE
$1.3000 = MARKET MAKER’S ASK QUOTE
MARKET MAKERS PROFIT SPREAD = $0.05
GENERAL PUBLIC
EXAMPLE #2
USD/JPY 87.00/90.00
USD = BASE CURRENCY
JPY = QUOTE CURRENCY
¥87 = MARKET MAKER’S BID QUOTE
¥90 = MARKET MAKER’S ASK QUOTE
MARKET MAKERS PROFIT SPREAD = 5 YEN
GENERAL PUBLIC
Page | 2