I have a quick question. How do you determine which to use…relating to % spread on currency FX rates… (bid - ask) / ask or (bid - ask) / bid or (bid - ask) / median Always an easy question, but I never seem to pick the right denominator.
isn’t it (ask-bid)/ask
(Ask - Bid)/Ask
right on the numerator (i’m a little slow). but what i’m reading is “the size of the spread is often expressed as a percentage of the bid, midpoint, or the ask price” (page 44 Secret Sauce). I believe it refers to the same thing in schweser. That said, from what the two of you have seen, is it always as a percentage of ask (both for this exam review and in the real world)? Thanks!
mebad Wrote: ------------------------------------------------------- > right on the numerator (i’m a little slow). > > but what i’m reading is “the size of the spread is > often expressed as a percentage of the bid, > midpoint, or the ask price” (page 44 Secret > Sauce). I believe it refers to the same thing in > schweser. > > That said, from what the two of you have seen, is > it always as a percentage of ask (both for this > exam review and in the real world)? > > Thanks! Yes you multiply it by 100 to get that in %.
For the exam it is (Ask - Bid)/Ask. Logically, it should be (Ask - Bid)/Bid. If you are a dealer and you are quoting some asset as Bid $10, Ask=$12, you are buying it for $10 and selling it for $12. You are making a 20% profit, which is $12-$10)/$10. So, the spread is really 20%.
Dreary, thanks. That is the logic I use each time and get it wrong! Hopefully now this will stick.
mebad Wrote: ------------------------------------------------------- > Dreary, thanks. > > That is the logic I use each time and get it > wrong! Hopefully now this will stick. That is why don’t use your logic in this exam. Take it as give. Its all CFAI way