Which of the following statement(s) is (are) true with respect to how spreads on forward foreign currency quotations can differ?

I. The greater the liquidity of the underlying currency in the spot market, the lower the spread on its forward quotation will be.
II. Spreads increase in the same direction as the time to expiration of the contract.
III. Current political risks underlying a currency will only impact spreads on spot quotes and not forward quotes.
IV. To build a long forward position in a currency, a dealer must narrow the spread in their quotation.

Correct Answer: I and II

II is true because the longer the dealer is forced to stay in a contract, the more compensation they will require.

III is false because current political risks underlying a currency will impact spreads on both the spot quotes and the forward quotes.

IV is false because to build a long forward position in a currency, a dealer must raise both her bid and ask price for that currency. In fact, to build inventory of that currency, the ask price must rise even more than the bid price, thus widening the spread.