1. Which of the following is false about the bid/ask spread on currency quotations?

Currencies for countries with frequent political risks (i.e., the country risk of the currency is high) will have smaller bid/ask spread.

The more intense the competition for the traded currency, the smaller the bid/ask spread is.

The higher the inventory costs, the larger the bid/ask spread is.

The larger the order costs, the larger the bid/ask spread is.

2. The current exchange rate is £1.00 = $1.60. Compute the correct balances in Bank A's correspondent account(s) with Bank B if a currency trader employed at Bank A buys £250,000 from a currency trader at Bank B for $400,000 using its correspondent relationship with Bank B.

Bank A's dollar-denominated account at B will fall by $400,000.

Bank A's pound-denominated account at B will fall by £250,000.

Bank B's pound-denominated account at A will rise by £250,000.

Bank B's dollar-denominated account at A will fall by $400,000.