Explanation

In the foreign exchange market, bid-ask spreads are influenced by several factors:

• Market volatility (Option A): Higher volatility increases risk for dealers, leading them to widen spreads to compensate for potential adverse price movements
• Market participation (Option B): Higher participation typically leads to narrower spreads due to increased liquidity and competition
• Dealer competition (Option C): Increased competition among dealers typically leads to narrower spreads as dealers compete for business

When market volatility is high, dealers face greater uncertainty about future exchange rates and increased risk of holding positions. To compensate for this additional risk, they widen the bid-ask spread.