CFAI seems to contradict the equation for effective spread. Is it: 2(mid quote - execution price) or is it 2(execution price - mid quote)? Specifically, in Book 5 p. 290 and then appendix A-21 in the answer to number 1. I realize that it is just the sign on the number that would be different, but if I know CFAI, both the negative and the positive would be answer choices on the exam. Thanks in advance!
One is for a buy transcation, another is for sell transaction. But I see your point.
2(mid quote - execution price) = buy (cuz you want to buy lower than the middle of the spread. 2(execution price - mid quote) = sell cuz you want to sell higher than the mid point.
strikershank Wrote: ------------------------------------------------------- > 2(mid quote - execution price) = buy (cuz you want > to buy lower than the middle of the spread. > > 2(execution price - mid quote) = sell cuz you want > to sell higher than the mid point. I thought it was the other way around…please correct me if I am wrong (very high probability) If you got a quote 2 by 2.10. The mid quote is 2.05. If you bought @ 2.09 (there is price improvement) because the effective spread is 2*(2.09-2.05)=0.08 instead of the actual spread of 0.1. If you sold @ 2.02 (there is price improvement) because the effective spread is 2*(2.05-2.02)=0.06 instead of the actual spread of 0.1. Am I rigth, or it is Friday, my brain is shutting down.
haven’t had a chance ot look into schweser yet…but if you buy at 2.09 with an mid quote of 2.05 you don’t have price improvement from the perspective of the buyer - you paid more than the average therefore that’s bad… so i think i’m right on this one. but i’ll look into it later. it is friday after all.
WS - you’re totally right…well done!
strikershank Wrote: ------------------------------------------------------- > WS - you’re totally right…well done! Now I can go home and have a drink!! Thanks man.
why stop at one?