What is a spread in business?
In finance, spread means the gap or difference between two prices or interest rates and can be applied to multiple trades. In stock trading, the bid-offer spread (also bid-ask, buy-sell or bid-offer spread) is the difference between a current bid and the ask prices for a stock. In futures trading, it is the price gap between delivery months for the same asset of a commodity.
Types of spread:
Here are other types of spread to consider.
- Spread trade or relative value trade. Usually this is done with securities like future contracts or options. The overall net trade executed produces a positive value, called the spread.
- Yield spread or credit spread. Commonly referred as the “yield spread of X over Y”, it measures the annual return on investment of one financial product minus the yearly return on investment of another.
- Option-adjusted spread. Usually this is used for mortgage-backed securities (MBS), options, interest rate movements and bonds. It works by discounting a security’s price and matching it to the actual market price.
- Z-spread, yield curve spread, zero-volatility spread or ZSPRD. This is used commonly for mortgage-backed securities. It is the spread that results from zero-coupon Treasury yield curves which are needed for discounting a predetermined cash flow schedule to reach its current market price. This kind of spread is also used in credit default swaps (CDS) to measure credit spread.
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Category: Financial Glossary