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New Member
Hi,
I'm reading the PDF found at http://www.asx.net.au/products/pdf/market_making.pdf The p.articular section I'm asking about is a section the deals with how volume affects the bid/ask quoted spread. The text presents the following scenario:
"If you buy a 10k call warrants with a delta of 50%, the issuer would need to buy 5k shares nearly simultaneously"
...
"When looking at the liquidity of the shares the bid and offer could look as follows:
Volume, Bid, Offer, Volume
2k, 4.67, 4.68, 1k
1k, 4.66, 4.69, 3k
3k, 4.65, 4.7, 2k
f the warrant issuer sells 10,000 warrants to you, they
would need to buy 5,000 shares that they could get at an
average price of $4.69, which is higher than the offer you
would see for the shares"
Now, I understand where they got the average of 4.69: .(JavaScript must be enabled to view this email address), .(JavaScript must be enabled to view this email address), .(JavaScript must be enabled to view this email address). What I don't understand is the last conclusion: "which is higher than the offer you would see for the shares". What is being referred to here? I understand that a larger volume would extract a higher premium as it would be more difficult to delta hedge the resulting exposure.. I'm just not sure what is meant by the last statement.
Thanks
I'm reading the PDF found at http://www.asx.net.au/products/pdf/market_making.pdf The p.articular section I'm asking about is a section the deals with how volume affects the bid/ask quoted spread. The text presents the following scenario:
"If you buy a 10k call warrants with a delta of 50%, the issuer would need to buy 5k shares nearly simultaneously"
...
"When looking at the liquidity of the shares the bid and offer could look as follows:
Volume, Bid, Offer, Volume
2k, 4.67, 4.68, 1k
1k, 4.66, 4.69, 3k
3k, 4.65, 4.7, 2k
f the warrant issuer sells 10,000 warrants to you, they
would need to buy 5,000 shares that they could get at an
average price of $4.69, which is higher than the offer you
would see for the shares"
Now, I understand where they got the average of 4.69: .(JavaScript must be enabled to view this email address), .(JavaScript must be enabled to view this email address), .(JavaScript must be enabled to view this email address). What I don't understand is the last conclusion: "which is higher than the offer you would see for the shares". What is being referred to here? I understand that a larger volume would extract a higher premium as it would be more difficult to delta hedge the resulting exposure.. I'm just not sure what is meant by the last statement.
Thanks
