If volatility in foreign exchange markets, what is the relationship to

If volatility in foreign exchange markets, what is the relationship to the bid—ask spread?

What will be an ideal response?

 

 

ANSWER

Answer: The bid-ask spread compensates the bank’s trader for making a market in the two currencies. This requires that the trader hold an inventory of foreign currency, and an increase in volatility exposes the trader to potentially larger losses from a depreciation of the foreign currency against the domestic currency. Traders consequently try to protect themselves by increasing the bid-ask spread in more volatile markets.

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