FRM Part II · FRM Exam Part II · Liquidity and Leverage
A dealer quotes a bond at a bid of 99.40 and an ask of 100.60. Using the standard definition, what are the quoted bid-ask spread and the relative (proportional) spread measured against the mid-price?
The quoted spread is the ask minus the bid, which is 1.20. Dividing by the mid-price of 100.00 gives a relative spread of 1.20%. The figure of 0.60 is only the half-spread, the approximate one-way transaction cost.
- AQuoted spread 1.20; relative spread about 1.20%Correct
- BQuoted spread 0.60; relative spread about 0.60%
- CQuoted spread 1.20; relative spread about 2.40%
- DQuoted spread 2.40; relative spread about 1.20%
Explanation
Quoted spread = 100.60 - 99.40 = 1.20. Mid-price = (100.60 + 99.40)/2 = 100.00, so relative spread = 1.20/100 = 1.20%. Using 0.60 gives the half-spread, which is the cost of one side of a round trip, not the full spread.
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