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Your fund is considering trading 10 year bonds issued by the
Your fund is considering trading 10-year bonds issued by the UAE government, and you see that at 9:30 a.m. their lowest ask price is $102.31 and their highest bid price is $99.50. Five seconds later a buy order for a block of $10 billion is executed at $102.76. At 10:30 a.m. you check the market again and see that the lowest ask price is $102.55 and their highest bid price is $100.02.
a. Compute the (absolute and relative) quoted spread at 9:30 and at 10:30.
b. Compute the (absolute and relative) effective ask-side half-spread at 9:30.
c. Compare the quoted half-spread with the effective (relative) ask-side half-spread at 9:30. What may explain this difference between them?
d. Compute the (absolute) realised spread in the 9:30-10:30 interval.
e. Compare the realised spread computed under (d) with the (absolute) effective spread at 9:30 computed under (b). What may explain the difference between them?
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