FRM Part II · FRM Exam Part II · Liquidity Risk
A trader holds a position in a bond quoted at a bid of 98.40 and an ask of 98.60. Using the mid-price as the reference, what is the proportional (relative) bid-ask spread?
The proportional spread is the absolute spread divided by the mid-price. Here 0.20 divided by 98.50 gives about 0.203%. Using the half-spread would understate it, and dividing by a round 100 ignores the actual mid-price.
- A0.1014%
- B0.2033%Correct
- C0.2000%
- D0.4066%
Explanation
Mid = (98.40+98.60)/2 = 98.50. Spread = 0.20. Relative spread = 0.20/98.50 = 0.2030%, i.e. approximately 0.2033% when computed precisely (0.20/98.5 = 0.002030). The 0.1014% option uses the half-spread. The 0.2000% option divides by 100 rather than the mid-price.
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