Bid vs. Offer

The bid is the price at which the market would buy the currency pair (before any commissions or fees), the
offer (or ask) is the price at which the market would sell the currency pair (before any commissions or fees).

Most market participants have no difficulty in determining the "bid" from the "ask" when they are dealing in their domestic or home currency. However, confusion usually prevails when doing a trade in a currency pair that differs from your standard foreign exchange requirements or if you happen to execute a trade in a currency that is not your home unit.

Foreign Exchange rates are always quoted in terms of the unit currency, where 1 of the "unit" currency yields X of the terms or settlement currency (the second currency in the pair). For example, a USDCAD exchange rate of 0.9950 means that 1 USD will yield .9950 CAD. Since the rate on the bid is always lower than the rate on the offer, it is then easy to determine whether you are on the bid or offer when asking for a quote. If you are buying the unit currency from your dealer, you will always receive a price that is higher than the price at which you sell it (as your dealer always wishes to buy low and sell high). As such, the price you receive will be on the offer.

AUD, GBP, NZD and EUR are all quoted in European terms against the USD. That is, the foreign currency is always the unit currency or the first currency in the pair (i.e. AUDUSD, GBPUSD, etc.). There are a few other minors and exotics that are quoted as such but in general, most other currencies are quoted in American terms with the USD being the unit currency. This is important because once you understand the pair and direction (which currency are you buying and which are you selling), determining which side of the market you should be quoted on is a breeze.

For example, with AUDUSD, one would buy AUD from the customer on the bid, thereby selling them USD. Alternatively, one would sell (or offer) the unit currency, AUD, on the offer and buy the second currency; USD.

EXAMPLE:

A Canadian company will need to purchase 100,000 US dollars to pay for imported goods.

The USDCAD quoted rate is 1.0625 on the bid and 1.0675 on the offer, by convention the USD is the unit currency and CAD is the terms currency.

The company will have to buy the USD on the dealer's offer, and will pay 1.0675 for each dollar bought.

The importer pays 100,000 x 1.0675= 106,750 CAD.

What is a Cross Rate and How To Derive One?