Final answer:
The bid price of K50 and offer price of K55 indicate the current buying and selling prices for an asset, respectively. The proportional bid-offer spread is a measure of the transaction cost relative to the asset's price, calculated as approximately 9.52% for this asset.
Step-by-step explanation:
When an asset is quoted with a bid price of K50 and an offer (or ask) price of K55, it indicates the price at which potential buyers are currently willing to purchase the asset (bid) and the price at which potential sellers are willing to sell the asset (offer).
The proportional bid–offer spread is a measure of the cost incurred by traders when transacting, expressed as a percentage of the midpoint between the bid and the offer prices. To calculate the proportional bid-offer spread, you would use the following formula:
Proportional Bid-Offer Spread = (Offer - Bid) / ((Bid + Offer) / 2)
Using the figures provided: Proportional Bid-Offer Spread = (55 - 50) / ((50 + 55) / 2)
= 5 / 52.5
= approximately 0.0952 or 9.52%.
This ratio reveals the relative size of the spread in relation to the average price level of the asset, providing an indication of market liquidity and transaction cost for this asset.