Hello steemians !

I hope you are doing well in your life. I hope you are keeping your health in this pandemic as first priority. So this is my homework post for @awesononso. The topic name is THe bid-ask spread so let's get started.

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Q1 Properly explain the Bid-Ask Spread?

Bid , Ask And Bid-Ask spread:-

Let's discuss the bid and ask, as well as the bid-ask spread. Basically, the bid is what you're attempting to obtain the order at. For example, if I'm seeking to buy a coin for $5.55, but the asking price is $5.65, the bid is what I'm trying to get the order at. I'll have to pay $5.65 in order to receive the order. We all know how quickly the market fluctuates up and down. However, if I must purchase at that same moment, I must pay the asking price, and if the market falls, I will receive my order at the bidding price. Now, the spread is essentially the difference, thus 5.65 minus 5.55 equals 0.10 cents.
The bid-ask spread is the difference between the two, and it's what the market makers have to make. The bid is basically what people are trying to buy, and the ask is what people are looking to get for that stock. Now you can divide that and maybe do a limit order at 5.60 in order to kind of split the order and both of you take a little bit of a hit and kind of bargain in the middle, but in reality, the bid-ask spread is what you're going to pay in the end. That's just part of the trading game, I suppose, and you have to account for it when you're trading, so keep that in mind while understanding the bid-ask spread when you're trading.

Q2 Why is the Bid-Ask Spread important in a market?

The bid-ask spread is significant in the market because it affects liquidity (or how liquid a market is). Liquidity, as we all know, refers to how an asset or item is exchanged. A liquid market is built on the Bid-Ask spread because the bid price is extremely close to the asking price in this market and the difference between them, known as the bid-ask spread, is tiny, allowing deals to be completed quickly and with both buyers and sellers satisfied. As a result, the Bid-ask spread plays an important role in the market. The smaller the gap in the bid-ask spread, the greater the trades; the higher the difference in the bid-ask spread, the smaller the trades and the illiquidity of the market.
The bid-ask spread approach is often employed in the cryptocurrency market. When a customer or buyer wants to buy, he sets a bidding price called a buying limit, and when he wants to sell, he sets an asking price called a sell order. When there is a small gap between the bid and asking price the volume of trades is always high.

Q3 If Crypto X has a bid price of $5 and an ask price of $5.20,

a.) Calculate the Bid-Ask spread.

we know that;

Bid-ask spread = ask price - bid price

so the spread will be;

Bid-ask spread = ask price - bid price
Bid-ask spread = $5.20 - $5
Bid-ask spread = $0.2

b.) Calculate the Bid-Ask spread in percentage.

The formula to find Bid-ask spread in percentage is;

%Spread = (Spread/Ask Price) x 100

putting the values

%Spread = (0.2/5.20) x 100
%Spread = 0.038 x 100
%Spread = 3.8 %

Q 4 If Crypto Y has a bid price of $8.40 and an ask price of $8.80,

a.) Calculate the Bid-Ask spread.

we know that;

Bid-ask spread = ask price - bid price

so the spread will be;

Bid-ask spread = ask price - bid price
Bid-ask spread = $8.80 - $8.40
Bid-ask spread = $0.4

b.) Calculate the Bid-Ask spread in percentage.

The formula to find Bid-ask spread in percentage is;

%Spread = (Spread/Ask Price) x 100

putting the values

%Spread = (0.4/8.80) x 100
%Spread = 0.045 x 100
%Spread = 4.5 %

Q 5 In one statement, which of the assets above has the higher liquidity and why?

The spread of crypto X = $0.2 and the spread of crypto Y = $0.4 are the two assets mentioned previously. As a result, the spread of crypto x is smaller than the spread of crypto Y in the scenario above. We all know that the lower or smaller the spread, the more liquid the market is. The bid and ask prices are quite close, resulting in more deals. So, in my opinion, crypto X has more liquidity.

Q6 Explain Slippage.

As we all know, the price of a cryptocurrency in the crypto market fluctuates very quickly, so if a buyer buys a coin at the current price, but the price changes after the order are placed and before the coin is purchased, this is known as slippage. Slippage is common and occurs due to low liquidity, which is defined as a difference in the bid-ask spread. In some words, we can say that slippage is the difference between the desirable and executed price. There are two types of slippage which we will discuss in the next question.

Q7 Explain Positive Slippage and Negative slippage with price illustrations for each.

slippage is of two types positive slippage and negative slippage.

Positive slippage:

let us first discuss the positive slippage. In simple words, we can say that the positive slippage occurs when the trade or order is placed or filled at a more desirable price than expected and intended. For buy orders, positive slippage occurs when the order is executed at a lower price than planned or meant. Similarly, the sell order positive slippage occurs when the order is executed or filled at a higher price than planned.

Example:-

For example, if the trade is to buy a crypto coin let consider it a Dot coin. I intended to buy it at a price of $26 but the order is filled at $25 which is lesser than the price I intended or meant. So its positive slippage would be
$26-$25=$1

similarly, if the trade is to sell a crypto coin let consider it a Dot coin. I intended to sell it at a price of $26 but the order is filled at $28 which is more than the price I intended or meant. So its positive slippage would be
$28-$26=$2

Negative slippage:-

we can say that the negative slippage occurs when the trade or order is placed or filled at a not desirable price than expected and intended. For buy orders, negative slippage occurs when the order is executed at a higher price than planned or meant. Similarly, the sell order negative slippage occurs when the order is executed or filled at a lower price than planned.

Example:-

For example, if the trade is to buy a crypto coin let consider it a Dot coin. I intended to buy it at a price of $25 but the order is filled at $26.5 which is higher than the price I intended or meant. So its negative slippage would be
$26.5-$25=$1.5

similarly, if the trade is to sell a crypto coin let consider it a Dot coin. I intended to sell it at a price of $26 but the order is filled at $24 which is lesser than the price I intended or meant. So its negative slippage would be
$28-$26=$2

conclusion:-

I conclude this homework post with that the professor explained the bid-ask spread topic very well. It was a wonderful go through this homework. I really enjoyed doing the homework and I came to know about the bid-ask spread liquidity slippage and its type and detail. Thank you very much professor for this learning oppurtunaty.