CFA Practice Question

There are 253 practice questions for this study session.

CFA Practice Question

Which of the following statement(s) is (are) true with respect to the factors that may have an affect on the bid-ask spread for currencies?

I. The higher the trading volume in a particular currency, the higher its spread will be.
II. The higher the standard deviation of the currency, the wider the spread that the dealer will seek.
III. The greater the degree of political stability backing a currency, the greater the spread will be.
IV. The greater the amount of a particular currency required by a dealer, the lower the bidding price will be.
A. II only
B. I, II and IV
C. III and IV
Explanation: I is incorrect because the higher the trading volume in a particular currency, the more liquidity will be inherent in the currency and thus, its spread will be narrower. The dealer would need less compensation in order to trade that currency.

On the other hand, II is correct because the dealer will need a higher compensation for currencies with higher volatility. Therefore III is incorrect, because with more political stability comes lower risk and thus narrower spreads.

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