This study provides evidence on quotations and bid-ask spreads in the
wholesale foreign exchange market, and introduces a method to document
variation in the placement of quotes relative to asset value. I find
that spreads widen with proxies for inventory-carrying costs, includin
g forecasts of price risk and a measure of liquidity costs. Increases
in spreads before nontrading periods can also be attributed to invento
ry costs. The location of currency quotes in relation to value is not
constant, and the outcome of hypothesis tests regarding changes in cur
rency value can be sensitive to allowances for variation in quote loca
tion.