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Problem 2. (5pt) Write one short comment (1-2 sentences) for each of these statements about the bid-ask spread, explaining whAny help is much appreciated

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i]

True.

The bid-ask spread is related to trading costs. A higher bid-ask spread means that trading costs are higher because the trade may not get executed at the price at which the decision is made to place the order.  That is, a high bid-ask spread may result in a change in the price at which the trade is actually executed.

ii]

True

The bid-ask spread includes dealer's inventory costs. The difference between the ask price and the bid price is the dealer's margin, and includes the dealer's profit as well as their inventory and carrying costs.

iii]

True

The bid-ask spread can be used as a liquidity measure. Higher liquidity means lower bid-ask spreads and lower liquidity means higher bid-ask spreads.  

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