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various ways such as by taking positions in the cash market
(e.g., holding or selling short U.S. Treasury securities), by
using interest-rate futures (which are traded on public
exchanges), or by entering into swaps.
H. Dealer Spreads
1. Bid-Ask Spread
The bid-ask spread is the difference between the bid and ask
interest rates which are quoted on the interdealer market. The
market bid is typically the highest among a set of dealers
surveyed. The market ask is typically the lowest. The market
bid and market ask need not come from the same dealer’s bid and
ask quotations. A particular dealer’s quoted bid and ask rates
will often deviate from the market bid and ask rates so that the
dealer’s mid-rate is not necessarily the midmarket rate.
2. Bid-to-Mid Spread
The spread from midmarket (also known as the bid-to-mid
spread) is the difference between the fixed interest rate that is
quoted on the interbank market and the midmarket rate for a swap.
The bid-to-mid spread equals one-half of the bid-ask spread.
3. Example
Assume that the market quotes a bid price of 6.5 percent
(the fixed rate it is willing to pay) and an ask price of 6.54
percent (the fixed rate it is willing to receive). The bid-ask
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