In an attempt to reduce her inventory, a dealer holding excess foreign currency should: A) quote a wider bid-ask spread. B) quote a narrower bid-ask spread. C) move the midpoint of her direct quote down. D) move the midpoint of her direct quote up.
I second the C.
A Edit: It should be C…
What’s the midpoint thing? how s it function?
dealers don’t adjust the spread, only the midpoint of the spread. I can’t remember the exact reason, but it has something to do with the markets basically would give the buyers of the currency a better deal if she widens her spread. Something like that. The CFA text has a pretty good explanation of it, and it is on like one page. Schweser didn’t do a good job of explaining it at all .
bigfin, doesn’t the midpoint represent the closing price? If so, moving the midpoint down is just a decrease in the price hence demand up
She is trying to decrease her inventory. Lowering the midpoint will lower her bid and ask price. Lowering the bid will cause less people will sell to her because she is offering less. Lowering the ask will cause more people to buy from her because she is asking a lower price.
Good explanation ^
got it. thank all!