Crypto Academy / Season 4 / Week 1 - Homework Post For @awesononso

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1. PROPERLY EXPLAIN THE BID - ASK SPREAD

Bid and Ask are terms that are used in the market place to signify the best price that buyers and sellers are willing to trade at. It represents the best price that an asset could be bought or sold at the current time. The bid represents demand for an asset while the ask represents the supply for an asset. We can then say that the bid price refers to the highest price that someone is willing to pay for a given asset. While the ask price refers to the lowest price that a supplier is willing to accept for a given asset.

Now, the difference between the highest price that a buyer is willing to pay for an asset and the lowest price that a seller is willing to accept is what is known as the bid-ask spread. So that difference between the bid price and ask price is what is said to be bid-ask spread. To illustrate this mathematically, it is given as:
Bid - Ask spread = Ask price - Bid price

2. WHY IS THE BID - ASK SPREAD IMPORTANT IN A MARKET?

The bid-ask spread is very important in a market and the reasons include:

  • Noting the fact that the bid-ask spread could be said to measure the supply and demand for a particular commodity, it could be said that the bid-ask spread indicates the market liquidity of a given asset. An asset that has very narrow or low bid-ask spread is said to be sufficiently liquid. And you know that the more liquid the asset, the more actively it changes hands and better the pricing.
  • Since bid-ask spread measures the trading risk of an asset, the higher the bid-ask spread, the higher the risk in trading the asset.
  • It could be said that the bid-ask spread serves as a guide on the type of order to be placed. In a normal circumstance, if the bid-ask spread is very low, one can get the best pricing with the market order itself. But if the spread gets wider, a limit order could be considered a better choice.
  • The bid-ask spread shows the direction of the market movement by virtue of its widening or narrowing. A trader can tweak trades accordingly.

3. IF CRYPTO X HAS A BID PRICE OF $5 AND AN ASK PRICE OF $5.20. (A) CALCULATE THE BID - ASK SPREAD (B) CALCULATE THE BID - ASK SPREAD IN PERCENTAGE?

Given: Ask price = $5.20; Bid price = $5
(A) Bid - Ask spread = Ask price - Bid price
Bid - Ask Spread = $5.20 - $5
Spread = $0.20

(B) Percentage of spread is given as : (spread/ask price) × 100
% spread = (0.20/5.20) × 100
= 3.846%

4. IF CRYPTO Y HAS A BID PRICE OF $8.40 AND AN ASK PRICE OF $8.80, (A) CALCULATE THE BID - ASK SPREAD. (B) CALCULATE THE BID - ASK SPREAD IN PERCENTAGE?

Given: Ask price = $8.80; Bid price = $8.40
(A) Spread = Ask price - Bid price
= $8.80 - $8.40
Spread = $0.40

(B) % Spread = (spread/ask price) × 100
%spread = (0.40/8.80) × 100
= 4.545%

5. IN ONE STATEMENT, WHICH OF THE ASSETS ABOVE HAS THE HIGHER LIQUIDITY AND WHY?

Crypto X has a higher liquidity than Crypto Y, and the reason is because Crypto X has a lower spread than Crypto Y and you know that the lower the spread, the higher the liquidity of a given asset.

6. EXPLAIN SLIPPAGE

In a market, when an order is placed you will notice that there is time lag between when the market order is placed and when the order is executed. During the time lag or delay between when a trade is ordered and when it is completed, there could be slight change in price possibly during periods of higher volatility or other circumstances. So, that difference between a trade's expected price and the actual price at which the trade is executed is referred to as slippage. It could be said that slippage represents all situations that a trader receives a different trade execution price than intended.

7. EXPLAIN POSITIVE SLIPPAGE AND NEGATIVE SLIPPAGE WITH PRICE ILLUSTRATIONS FOR EACH.

POSITIVE SLIPPAGE
Positive slippage takes place when a market order is completed or executed at a better price than expected. This means that a buy or sell order could have a positive slippage.

A buy order has a positive slippage when the order is executed at a better price, a price lower than expected. Take for example, if a market order was placed for asset A to be bought at $50, but the order was executed at $48, you will notice that you have a price that is better than $2. That is, positive slippage is $50 - $48 = $2

In addition, a sell order has a positive slippage when the order is executed at a price higher than expected. As an example, if a market trade was placed for asset B to be sold at $50, but the trade was completed at $51, you have a price better or higher by $1. That is, positive slippage = $51 - $50 = $1

NEGATIVE SLIPPAGE
A negative slippage takes place when a market order is executed at a worse price than expected. It is also important to note that a buy or sell order could have a negative slippage.

A buy order has a negative slippage when the order is executed at a worse price, a price higher than expected. Let's say a trade was placed for asset X to be bought at $50, but the trade was executed at $52, you will have a negative slippage of $2. That is, negative slippage = $52 - $50 = $2

In addition too, a sell order has a negative slippage when the order is executed at a price lower than expected. Consider an example, if a trade was placed for asset Y to be sold at $50, but the trade was completed at $48, you will have a negative slippage of $2. That is, negative slippage = $50 - $48 = $2

CONCLUSION

I can say that bid-ask spread is really a phenomenon that helps traders to make good decisions while trading and possibly tweak their trade to minimize losses.

I am grateful to professor @awesononso

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Hello @michaelu40,
Thank you for taking interest in this class. Your grades are as follows:

CriteriaCalculation
Presentation/Use of Markdowns1.7/2
Compliance with Topic1.8/2
Quality of Analysis & Calculations1.5/2
Clarity of Language2/2
Originality & Expression1.8/2
Total8.8/10

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Feedback and Suggestions
  • Nice job on this but there are just some places that needed more explanations to be clearer.

  • There are also some points still missing on the topic.

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Thanks again as we anticipate your participation in the next class.