Question

the arizona stock exchange lists a bid price of 1.21 and ask price of 1.40 for company z . what what price can you buy the stock and what is the dealer bid ask spread?

a. 1.40 and bis ask spread is 0.18.

b. 1.40 and bid -ask price spread is 0.19

c. 1.21 and bid- ask price spread is 0.18

d. 1.21 and bid ask price spread is 0.19

Answer 1

Solution:

The Bid ask price prevalent can be understood as follows:

From the perspective of the dealer:

Bid Price : The Bid price is the price at which the exchange dealer is willing to buy a given stock.

Ask Price : The Ask price is the price at which the exchange dealer is willing sell a given stock.

From the perspective of the buyer:

Bid Price : The Bid price is the price at which the customer is willing to sell a given stock.

Ask Price : The Ask Price is the price at which the customer is willing to buy a given stock.

a.

As per the information given in the question bid ask prices provided are from the point of view of the dealer i.e., the Arizona stock exchange

Since the company wants to buy a bond he will have to follow the selling price of the dealer i.e., Arizona stock exchange's ask rate. From the dealer’s point of view selling rate is the ask rate = $ 1.40

Thus price at which the stock can be bought is the ask rate = 1.40

b.

The formula for calculating the Bid ask spread is = ( Ask price – Bid price )

We know that Ask price = $ 1.40 and Bid price = $ 1.21

Thus Bid ask spread = $ 1.40 - $ 1.21 = $ 0.19

Thus price at which the stock can be bought is the ask rate = 1.40 and the bid ask spread is 0.19

The solution is option b. 1.40 and bid -ask price spread is 0.19