Spreads

<body onLoad="MM_checkPlugin('Shockwave Flash','','http://www.riskglossary.com/default_nofl.htm',false);return document.MM_returnValue" stylesrc="../_private/template.htm" bgcolor="#FFFFFF" link="#669933" vlink="#000000" alink="#000000"> <div align="left"> <table border="0" cellpadding="0" cellspacing="0" style="border-collapse: collapse" bordercolor="#111111" width="100%" id="table1"> <tr> <td width="740"> <table border="0" cellpadding="0" cellspacing="0" style="border-collapse: collapse" bordercolor="#111111" width="100%" height="37" id="table2"> <tr> <td height="35" width="100%"> <table border="0" cellspacing="0" style="border-collapse: collapse" bordercolor="#111111" width="100%" cellpadding="0" id="table3"> <tr> <td width="100%" align="left" valign="top"> <p class="header_gold">Spreads</td> <td width="45" align="right" valign="bottom"> <map name="FPMap6"> <area href="http://www.contingencyanalysis.com" shape="rect" coords="1, 0, 44, 11" target="_top"> </map> <img border="0" src="../images/home.gif" usemap="#FPMap6" width="45" height="12"></td> </tr> </table> </td> </tr> <tr> <td width="100%" bgcolor="#CC9966" height="2"> <img border="0" src="../images/blank_2x2.gif" width="2" height="2"></td> </tr> <tr> <td width="0%" valign="top" bgcolor="#FFFFCC"> <table border="0" style="border-collapse: collapse" bordercolor="#111111" width="100%" cellpadding="0" cellspacing="1" id="table4"> <tr> <td width="0%" align="left" valign="top"> <p class="header2_black">Explained:<br> <img border="0" src="../images/blank_1x100.gif" width="100" height="1"></td> <td width="0%" align="left" valign="top"> <p class="word_list"> <a href="#basis">basis</a><p class="word_list"> <a href="#bid-ask spread">bid-ask spread</a><p class="word_list"> <a href="#bid-offer spread">bid-offer spread</a><p class="word_list"> <a href="#calendar spread">calendar spread</a><p class="word_list"> <a href="#crack spread">crack spread</a><br> <img border="0" src="../images/blank_1x160.gif" width="160" height="1"></td> <td width="100%" align="left" valign="top"> <p class="word_list"> <a href="#mid-offer price">mid-offer price</a><p class="word_list"> <a href="#spark spread">spark spread</a><p class="word_list"> <a href="#spread">spread</a><p class="word_list"> <a href="#TED spread">TED spread</a><br> <img border="0" src="../images/blank_1x160.gif" width="160" height="1"></td> </tr> </table> </td> </tr> </table> <table border="0" cellpadding="0" style="border-collapse: collapse" bordercolor="#111111" width="310" align="right" id="table5"> <tr> <td align="right" width="9" height="14"></td> <td width="300" height="14"> <font size="2"> </font><font size="4"> </font></td> </tr> <tr> <td align="right" width="9"> </td> <td width="300"> <script type="text/javascript"></script> <script type="text/javascript" src="http://pagead2.googlesyndication.com/pagead/show_ads.js"> </script>  </td> </tr> </table> <p class="body">The word <b><a name="spread">spread</a></b> is used in different ways. First, a spread is a difference between two related prices or other financial variables. Second, a <a href="../articles/futures_spread.htm"> futures spread</a> is a <a href="../articles/short_sale.htm">long-short</a> <a href="../articles/future.htm">futures</a> position designed to give exposure to a spread (of the first sense). Third, an <a href="../articles/options_spread.htm">options spread</a> is a position comprising two or more related <a href="../articles/option.htm">options</a>. 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.</p> <table border="0" cellpadding="0" cellspacing="0" style="border-collapse: collapse" bordercolor="#111111" width="165" align="left" id="table6"> <tr> <td width="160"> <script type="text/javascript"></script> <script type="text/javascript" src="http://pagead2.googlesyndication.com/pagead/show_ads.js"> </script> </td> <td width="11"> </td> </tr> </table> <p class="body">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 <b><a name="bid-ask spread">bid-ask spread</a></b> (or <b><a name="bid-offer spread">bid-offer spread</a></b>). Depending upon the market, quotes may be expressed as actual prices, <a href="../articles/yield.htm">yields</a>, implied volatilities, etc. Bid-ask spreads are measured in similar units. Bid-ask spreads are sometimes used as a measure of a market's <a href="../articles/liquidity.htm">liquidity</a>, with narrow bid-ask spreads indicating greater liquidity. The average of the bid and ask prices is called the <b><a name="mid-offer price">mid-offer price</a></b>.</p> <p class="body">In money markets and foreign exchange markets, certain spreads are actively tracked. One is the <b><a name="TED spread">TED spread</a></b>, which is a difference between T-bill and Eurodollar rates. Being a spread between a  "risk free" <a href="../articles/treasury_securities.htm">Treasury</a> rate and comparable commercial rate, it offers an indication of market-wide credit concern. Spreads between <a href="../articles/libor.htm">Libor</a> rates for different currencies are also important because these determine <a href="../articles/forward.htm">forward</a> exchange rates and can indicate relative strength or weakness in currencies.</p> <p class="body">In futures markets, the spread between a futures price and the <a href="../articles/derivative_instrument.htm">underlier's</a> <a href="../articles/settlement.htm">spot price</a> is known as the futures <b><a name="basis"> basis</a></b>. The term "basis" is used as a synonym for "spread" in other contexts. For example, the spread between two floating interest rates—say the <a href="../articles/bankers_acceptance.htm">bankers acceptance rate</a> and Libor—is called a basis.</p> <p class="body">In fixed income markets, the yields or <a href="../articles/fixed_income_term_structure.htm">spot rates</a> at which instruments trade are modeled as comprising some benchmark yield or interest rate plus spreads attributed to factors such as <a href="../articles/credit_risk.htm">credit risk</a>, liquidity, embedded <a href="../articles/option.htm">options</a> or tax advantages. See the related article <a href="../articles/interest_rate_spreads.htm"> Components of Yields and Spot Rates</a>.</p> <p class="body">A <b><a name="calendar spread">calendar spread</a></b> 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.</p> <table border="0" cellpadding="0" cellspacing="0" style="border-collapse: collapse" bordercolor="#111111" width="345" align="right" id="table7"> <tr> <td align="right" width="9"> </td> <td width="336"> <script type="text/javascript"></script> <script type="text/javascript" src="http://pagead2.googlesyndication.com/pagead/show_ads.js"> </script>  </td> </tr> </table> <p class="body">Spreads between prices for raw materials and finished goods are important in many markets. A <b><a name="crack spread">crack spread</a></b> is a spread between crude and refined oil prices. A <b> <a name="spark spread">spark spread</a></b> 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.</p> <p class="body">Physical commodities often trade at spreads to benchmark <a href="../articles/future.htm">futures</a>. 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. </p> <table border="0" cellpadding="0" cellspacing="0" style="border-collapse: collapse" bordercolor="#111111" width="100%" id="table8"> <tr> <td height="30" valign="bottom" colspan="2"> <p class="header2_black">Related Internal Links</td> </tr> <tr> <td colspan="2" bgcolor="#CC9966" height="2"> <img border="0" src="../images/blank_2x2.gif" width="2" height="2"></td> </tr> <tr> <td bgcolor="#FFFFCC" colspan="2"> <table border="0" cellspacing="0" style="border-collapse: collapse" bordercolor="#111111" width="100%" cellpadding="6" id="table9"> <tr> <td width="100%"> <p class="explanatory_text"> <img border="0" src="../images/bullet_link_glossary.gif" width="26" height="15"><strong style="font-weight: 400"><a href="../articles/basis_swap.htm">basis swap</a> A floating-for-floating interest rate or currency swap.</strong></p> <p class="explanatory_text"> <img border="0" src="../images/bullet_link_glossary.gif" width="26" height="15"><a href="../articles/interest_rate_spreads.htm">components of yields and spot rates</a> Credit spreads, liquidity spreads, optionality spreads, tax spreads, etc.</p> <p class="explanatory_text"> <img border="0" src="../images/bullet_link_glossary.gif" width="26" height="15"><a href="../articles/futures_spread.htm">futures spread</a> <strong style="FONT-WEIGHT: 400">A long-short futures position.</strong></p> <p class="explanatory_text"> <img border="0" src="../images/bullet_link_glossary.gif" width="26" height="15"><a href="../articles/options_spread.htm">options spread</a> <strong style="FONT-WEIGHT: 400">A position combining two or more options on a single underlier.</strong><p align="left" class="explanatory_text"> <img border="0" src="../images/bullet_link_glossary.gif" width="26" height="15"><strong style="font-weight: 400"><a href="../articles/spread_risk.htm">spread risk</a> Risk due to exposure to some spread.</strong></p> </td> </tr> </table> </td> </tr> <tr> <td height="30" valign="bottom" colspan="2"> <p class="header2_black">Sponsored Links</td> </tr> <tr> <td colspan="2" bgcolor="#CC9966" height="2"> <img border="0" src="../images/blank_2x2.gif" width="2" height="2"></td> </tr> <tr> <td bgcolor="#FFFFCC" width="75"> <img border="0" src="../images/ad_side_banner_1.jpg" width="103" height="285"></td> <td bgcolor="#FFFFCC" width="99%">  <p class="ad_legend" style="margin-left: 0; margin-bottom:2"> <a target="_top" href="http://www.riskexpertise.com/link/advertising.htm"> <font color="#000000">Ads by Contingency Analysis</font></a></p> <p style="margin-top: 0; margin-bottom: 0"> <iframe src="http://servedbyadbutler.com/adserve/;ID=147917;size=336x265;setID=82436;type=iframe" style="margin: 0px; padding: 0px; border-width: 0px" width="336" height="265" frameborder="0" marginwidth="0" marginheight="0" scrolling="no" name="I1"> <![if lt IE 4]> <script src="http://servedbyadbutler.com/adserve/;ID=147917;size=336x265;setID=82436;type=js" type="text/javascript"> </script> <noscript> <a href="http://servedbyadbutler.com/go2/;ID=147917;size=336x265;setID=82436"> <img src="http://servedbyadbutler.com/adserve.ibs/;ID=147917;size=336x265;setID=82436;type=img" border="0" height="265" width="336" alt=""></a> </noscript><![endif]></iframe>   </td> </tr> </table>  <p align="center"><map name="FPMap0_I1"> <area target="_top" href="http://www.riskglossary.com" shape="rect" coords="0, 0, 164, 102"> </map><img border="0" src="../images/logo.jpg" usemap="#FPMap0_I1" width="165" height="103"></p> <p align="center"><span class="verdana10"> <a href="http://www.riskglossary.com/main/disclaimer.htm">Disclaimer</a></span></p> <p align="center">website: <span class="verdana10"> <a target="_top" href="http://www.contingencyanalysis.com">http://www.contingencyanalysis.com</a></span><br> glossary direct link: <span class="verdana10"> <a target="_top" href="http://www.riskglossary.com">http://www.riskglossary.com</a></span><br> copyright © Contingency Analysis, 1996 - current</p> <p align="center"><map name="FPMap1_I1"> <area target="_top" href="http://www.contingencyanalysis.com" shape="rect" coords="0, 0, 240, 88"> </map><img border="0" src="../images/logo_glossary_white.gif" usemap="#FPMap1_I1" width="241" height="89"></p> </td> <td>  </td> </tr> </table> </div> </body>