Question

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

a. The more willing buyers and sellers there are, the more liquid a market is.
b. The spot markets for heavily traded currencies such as the Japanese yen are very liquid.
c. A currency's liquidity affects the ease with which an MNC can obtain or sell that currency.
d. 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 regarding spot market liquidity is that an MNC can quickly purchase an illiquid currency at a reasonable exchange rate, which is typically not the case due to the lack of market participants.

d. If a currency is illiquid, an MNC is typically able to quickly purchase that currency at a

reasonable exchange rate.

Step-by-step explanation:

The question asks which statement is not true with respect to spot market liquidity. Among the options provided, the one that is not true is

(d) If a currency is illiquid, an MNC is typically able to quickly purchase that currency at a reasonable exchange rate. This is incorrect because illiquid markets make it difficult to execute transactions quickly without a significant change in price due to the lack of willing buyers and sellers.

Spot market liquidity is higher when there are more participants and transactions can be completed swiftly at stable prices. Heavily traded currencies like the Japanese yen tend to have high liquidity, making transactions easier for Multinational Corporations (MNCs).

A currency's liquidity significantly affects the ease of transactions in the foreign exchange market for both obtaining and selling that currency.