Question

Which of the following is NOT true with respect to spot market liquidity?

1) The more willing buyers and sellers there are, the more liquid a market is.
2) The spot markets for heavily traded currencies such as the Japanese yen are very liquid.
3) A currency's liquidity affects the ease with which an MNC can obtain or sell that currency.
4) If a currency is illiquid, an MNC is typically able to quickly purchase that currency at a reasonable exchange rate.

Answer 1

The incorrect statement about spot market liquidity is that an MNC can quickly purchase an illiquid currency at a reasonable rate; in reality, illiquidity hampers quick transactions at stable rates.

Step-by-step explanation:

When it comes to spot market liquidity, several factors indicate how liquid a market is. First, market liquidity increases with the presence of more willing buyers and sellers. Second, heavily traded currencies like the Japanese yen typically have very liquid spot markets. Third, a currency's liquidity significantly affects the ease with which a multinational corporation (MNC) can obtain or sell that currency.

The statement that is NOT true with respect to spot market liquidity is: "If a currency is illiquid, an MNC is typically able to quickly purchase that currency at a reasonable exchange rate." In fact, the opposite is true; an illiquid currency would make it difficult for an MNC to make quick trades without potentially affecting the exchange rate unfavorably.