Answer:
The answer is below
Explanation:
a) The spread is the difference between the ask and bid price, it is given by:
Spread = ask - bid
The outright quotes are given as:
1 - month forward:
Bid = 1.2573 + 0.0010 = 1.2583
Ask = 1.2599 + 0.0015 = 1.2614
3 - month forward:
Bid = 1.2573 + 0.0014 = 1.2587
Ask = 1.2599 + 0.0015 = 1.2621
1 - month forward:
Bid = 1.2573 + 0.0020 = 1.2593
Ask = 1.2599 + 0.0030 = 1.2629
Bid Ask Spread
1 - month forward: 1.2583 1.2614 0.0031
3 - month forward: 1.2587 1.2621 0.0034
6 - month forward: 1.2593 1.2629 0.0036
b) The spread widen as it spot moves to 6 - month, this can lead to a thinner trading volume.