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Basic Question 6 of 19
The percentage spread on a currency quotation should be smaller for:
II. a 360 day forward than a 90 day forward.
III. a currency with many market makers than one with a few market makers.
I. a currency with high volatility than one with low volatility.
II. a 360 day forward than a 90 day forward.
III. a currency with many market makers than one with a few market makers.
User Contributed Comments 6
| User | Comment |
|---|---|
| vatsal92 | More the traders, lesser is the volatility. |
| ankurwa10 | I think it is more the number of traders, therefore ask/offer is going to be lower (competition?) |
| J0rdanl | Ankurwa - The reasoning provided in the answer is the best to explain this concept - the spread is driven by risk, read the reasoning and then look at why A and B has to be wrong. |
| Inaganti6 | i actually think it's because of arbing.... lack of arbing makes it illiquid and drives more risk....too much arbing leads to liquidity, narrower spreads, and less risk due to liquidity ease |
| khalifa92 | more liquidity in market less bargaining power for dealers |
| mezoltan | It is s simple competition. If you (let's say, as a portfolio manager) can ask 5 traders to quote an FX for you, you can just pick the cheapest, but if there is only 1 trader who can quote that FX, he will use his monopolistic position to quote a higher price for you. |
I am using your study notes and I know of at least 5 other friends of mine who used it and passed the exam last Dec. Keep up your great work!
Barnes
Learning Outcome Statements
calculate and interpret the bid-ask spread on a spot or forward foreign currency quotation and describe the factors that affect the bid-offer spread;
identify a triangular arbitrage opportunity and calculate its profit, given the bid-offer quotations for three currencies;
CFA® 2025 Level II Curriculum, Volume 1, Module 8.