Question #13
Reading: Reading 35 Exchange-Traded Funds - Mechanics and Applications
PDF File: Reading 35 Exchange-Traded Funds - Mechanics and Applications.pdf
Page: 4
Status: Unattempted
Correct Answer: B
Question
The maximum spread on an ETF is most likely to be negatively related to the:
Answer Choices:
A. risk premium demanded by the authorized participants (APs) for carrying the trade until the close of trading
B. probability of authorized participants (APs) completing an offsetting the trade in secondary market
C. spread quoted on the underlying securities
Explanation
The maximum spread on an ETF is positively related to creation/redemption fees plus
other trading costs, spread on the underlying securities, risk premium for carrying the
trade until close of trading, and AP's normal profit margin. Maximum spread is negatively
related to the probability of offsetting the trade in the secondary market.