The word spread is used in different ways. First, a spread is a difference between two related prices or other financial variables. Second, a futures spread is a long-short futures position designed to give exposure to a spread (of the first sense). Third, an options spread is a position comprising two or more related options. The name was probably coined by analogy to futures spreads, but options spreads are designed to offer other types of exposures. This article discusses some important spreads of the first (difference between two variables) type. In any market in equilibrium, there will generally be a difference between the best quoted ask price and the best quote bid price. That difference is called the bid-ask spread (or bid-offer spread). Depending upon the market, quotes may be expressed as actual prices, yields, implied volatilities, etc. Bid-ask spreads are measured in similar units. Bid-ask spreads are sometimes used as a measure of a market's liquidity, with narrow bid-ask spreads indicating greater liquidity. The average of the bid and ask prices is called the mid-offer price. In money markets and foreign exchange markets, certain spreads are actively tracked. One is the TED spread, which is a difference between T-bill and Eurodollar rates. Being a spread between a "risk free" Treasury rate and comparable commercial rate, it offers an indication of market-wide credit concern. Spreads between Libor rates for different currencies are also important because these determine forward exchange rates and can indicate relative strength or weakness in currencies. In futures markets, the spread between a futures price and the underlier's spot price is known as the futures basis. The term "basis" is used as a synonym for "spread" in other contexts. For example, the spread between two floating interest rates—say the bankers acceptance rate and Libor—is called a basis. In fixed income markets, the yields or spot rates at which instruments trade are modeled as comprising some benchmark yield or interest rate plus spreads attributed to factors such as credit risk, liquidity, embedded options or tax advantages. See the related article Components of Yields and Spot Rates. A calendar spread is a spread between the same variable at two points in time. A calendar spread for the price of an agricultural product prior to and after a harvest might be of interest, as might be the calendar spread between the price of natural gas in Summer and Winter. Spreads between prices for raw materials and finished goods are important in many markets. A crack spread is a spread between crude and refined oil prices. A spark spread is a spread between an electricity price and the price of the fuel required to generate that electricity. Spreads for prices of the same commodity at two geographically separate delivery points can reflect transportation costs or indicate temporary shortages at one location. Spreads between different qualities of goods are also tracked. Physical commodities often trade at spreads to benchmark futures. For example, in the coffee market, numerous growths of coffee are traded, but these are generally quoted at spreads to a handful of futures contracts.
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