In an attempt to reduce her inventory, a dealer holding excess foreign currency should: A) quote a wider bid-ask spread. B) move the midpoint of her direct quote down. C) quote a narrower bid-ask spread. D) move the midpoint of her direct quote up.
B Edit: I was all over the refresh button on that one.
B def you don’t reduce spreads because those are based on volatility, volumes etc
b.
B, 100%
dammit…can someone pls this concept pls??
I agree B… because dealer wants to sell foreign currency, the dealer sells at the ask-price and he wants to lower his price to sell his holding of excess foreign currency. So the only way that can happen is by B.
you lower the ask because you want to sell your holdings, lowest offer/ask sells. you also lower your bid because if you still hold the high bid, you may end up buying more of the currency you are trying to unload. highest bid buys.
isn’t B the same thing as narrowing the bid-ask spread?
the ideea is that you don’t want to narrow your spread because then you wouldn’t be recompensated for your risk a wider spread wont do anything and moving the midpoint up also so you move your midpoint down then you sell lower and buy lower that would probably result in decrease of inventory since not a lot of supply at low prices
If you narrow the bid-ask spread then the bid price you pay to purchase foreign currency will go higher.
hmm…kinda getting it now…thanks guys…can’t believe i am breakng my head with bid-ask spreads at this point…embaressing…
Edit: Too Slow. Don’t worry, econ has some of the easiest to do, and easiest to fup material on the exam.
I just realised that I don’t remeber a lot of temporal method stuff so I’m reviewing now … shitz