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Basic Question 7 of 20
Which of the following statement(s) is (are) true with respect to how spreads on forward foreign currency quotations can differ?
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.
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.
User Contributed Comments 5
| User | Comment |
|---|---|
| Tukker | Someone care to explain IV? |
| jingie | Spreads are higher for longer maturity forwards because there is greater uncertainty about the fluctuations of the currency. |
| ciji | her ...? the world over there is more adrenalin in the dealing room ! |
| Thecatz89 | If dealer raises the bid-ask price, less people will be enclined to buy the currency, and more will be encline to sell the currency. So the dealer is making a reserve of the currency. He is long. Hope i have helped ! |
| Adi8232 | lolllllll, good point ciji |
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
explain spot and forward rates and calculate the forward premium/discount for a given currency;
calculate the mark-to-market value of a forward contract;
CFA® 2025 Level II Curriculum, Volume 1, Module 8.