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CFA Level I · CFA Level I Exam · Exchange Rate Calculations

Compared with a dealer quoting a major currency pair in a liquid interbank market, a dealer quoting an exotic currency pair in a thin market will most likely set a:

The dealer will most likely set a wider bid-ask spread. Thin markets and volatile exotic currencies expose dealers to greater inventory and price risk and make offsetting trades harder, so they demand more compensation through a larger spread.

  1. Anarrower bid-ask spread
  2. Bwider bid-ask spreadCorrect
  3. Cbid above the ask

Explanation

Lower liquidity, higher volatility and greater inventory risk increase dealer compensation required, which widens spreads. A bid above the ask would create an arbitrage opportunity and does not occur in a dealer quote.

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