Quiz 4 Answer for Question 1 There are many types of factors can be related to could make the spread small. There are frequencies of currency that are being traded such as USD, current liquidity and efficiency of the information and market. In simply, spread small are described as if there is a few money changers at the same location, there is a spread of the popular currency a much smaller due to competition. First of all, the main factor is high frequency trading, as simplified, HFT. High frequency trading is a kind of platform that uses computers to do transaction of large number of orders at high speeds. It been usually, used to analyse huge markets and process the orders based on current market for example I-Forex. …show more content…
Liquidity spread is a premium that flows to a party, which provide liquidity to a party that is demanding. It is used for future contracts, exchange traded and bonds. For example, if a investors in long term bonds, get to faces the risk which is, the interest rates decline over time, it will reduce the value of bonds they have. This liquidity spread will compensates the holder of the bond for this risk. If volatility of the interest rates is increase, the greater the liquidity of spread. If in a market, there is a larger of buyers and sellers, the spread will significantly small and will be value. Finally, efficiency of market information. If the market is informationally efficient, the trading cost will be zero. A changing of price would be happen when unanticipated information is received. Usually we might think that, the value as a main of the spread, but when the news is arrived that both bid and ask price have made different, which is their average is equilibrium value. It is mean to that, bid-ask average fluctuates in an efficient …show more content…
There are spot transaction, forward transaction and swap transaction. Spot transaction is refer to the deal being precede on the spot current price. It is a contract that commonly for deliveries within two business days. In other words, it is called as Forex, which is defines as market trades electronically around the world. It is usually executed between two financial institutions or it would be between a company and financial institution. For example money changer and banks. Even though, the transaction is on the spot, the risky would be high. The most common of traded currency pair is Euro vs U.S. dollars. Secondly forward transaction or rate. Forward transaction is used to quote a financial transaction that takes place on future date and it is a settlement price. The daily cash flows take place on future contract. In other words, a currency forward is a hedging tool that does not involve in any upfront payment. It can be tailored to a particular amount and delivered period. For example Insurance. We can choose the contract. It will be less risk for