Question

A stock market is a public market for trading a company's stocks and derivatives. The bid-ask spread in a dealer market represents the profit that a dealer would make on a transaction involving a security. Which of the following statements best describes the bid-ask spread? The difference between the closing price of the security and the opening price of the security on the day of the transaction. The difference between the price at which a dealer is willing to buy a security and the price at which a dealer is willing to sell it. The sum of the price at which a dealer is willing to buy a security and the price at which a dealer is willing to sell it. Erik, a trader, wants to buy 1,000 shares of XYZ stock, while a second trader, Alison, is willing to sell 1,500 shares of the same stock. Unfortunately, Erik and Alison don't know one another and must complete their transactions using the stock exchange's market-making dealer. XYZ's market maker is willing to sell her shares for $30.65 per share and purchase additional shares for $30.25 per share. Select the most appropriate values in the following table: Term Bid price Ask price Bid-ask spread Value $30.25 $30.65 $0.40 If the market maker is willing to purchase the entire block of 1,500 shares from Alison and, from that block, resell 1,000 shares to Erik, then the market maker's net profit from Erik's transaction-excluding any inventory effects-will be_______.

Answer 1

Answer: The difference between the price at which a dealer is willing to buy a security and the price at which a dealer is willing to sell it.

Net profit = $400

Explanation:

The bid ask spread is the difference between the price at which a dealer is willing to buy a security and the price at which a dealer is willing to sell it.

From the question, we have been given the following information:

Bid price = $30.25

Ask price = $30.65

Bisk ask spread = Ask price - Bud price

= $30.65 - $30.25

= $0.40

Net profit = $0.40 × 1000

= $400