Forex Market Participation

Central Banks
Fixed Exchange Rates
 Maintaining a Fixed Exchange Rate
Sells to Reduce Value

Desired
Currency
Value

Buys to Increase Value

Floating Currencies
Bank of Japan Intervention
FX Interbank Players
 Top 10 currency traders
% of overall volume, May 2010
Rank Name Market Share
1 Deutsche Bank 18.06%
2 UBS AG 11.30%
3 Barclays Capital 11.08%
4 Citi 7.69%
5 Royal Bank of Scotland 6.50%
6 JPMorgan 6.35%
7 HSBC 4.55%
8 Credit Suisse 4.44%
9 Goldman Sachs 4.28%
10 Morgan Stanley 2.91%
 Hedge Funds
SPINNAKER
Capital Group

Tell
Investments
 Hedge Funds

• George Soros
 Market Makers
• A market maker for a currency is a dealer who
regularly quotes the rates at which he is willing
to buy and to sell that currency.
• During normal hours, he creates a two-sided
market for its customers. He is willing (within
reason) to both buy and sell at the rates he
quotes.
• He makes a profit from the spread; that is the
difference between the selling and buying rates.
Multinational Corporations
 Individuals
Japan = 0.5 % Australia = 7.25%
Individuals- Travelers
Individuals - Speculators
The Major Currency Centers
Start of Trading Sunday
Asian Trading Sessions
European Trading Sessions
The US Session
The Main Currencies of the World
The US Dollar (USD)
• Commodities Quoted in
USD
• World’s Reserve
currency
• 80% of All Currency
Transactions Involve
USD
The EURO (EUR)
• Introduced in 1999 as
Part of EU

• Used in Over 1 Dozen

Countries
The Japanese Yen (JPY)
• Stagnant Growth Since
Late 80’s
• Interest Rates Close to
Zero
• Reliant upon Imported
Energy
• Export Oriented
Economy
The Pound Sterling (GBP)
• Opted Out of EMU

• Reputation for Sound

Monetary Policy
The Swiss Franc (CHF)
• Known for Sound
Banking System

• Safe Haven Currency

The Australian Dollar (AUD)

• Heavily Dependent on
Price of Gold

• One of the Highest

Interest Rates In
Industrialized World
The New Zealand Dollar (NZD)
• Heavily Dependent on
Commodity Prices

• Heavily Dependent on
Australia

• One of the Highest

Interest Rates In
Industrialized World
The Canadian Dollar (CAD)
• Heavily Dependent on
Commodity Prices

• Largest Exporter of Oil

to United States

• Over 80% of Exports

Come to US
 Types of Transactions
Daily averages in April in billions of US dollars

1800
1600
1400
1200
Spot
1000
Outright Forward
800
Swap
600
400
200
0
1992 1995 1998 2001 2004 2007

Source: BIS
 Triangular Arbitrage
• Opportunities for triangular arbitrage arise
when direct quotations (exchange rates in
terms of the dollar - this is another sense of
this word) and cross-rate quotations (two
other currencies against each other) allow for
profit making.
• This entails using one currency to buy a
second, a second currency to buy a third, and a
third currency to buy the first.
 Example of Triangular Arbitrage
• Suppose the pound is quoted at 2.0000 dollars
per pound.
• Suppose that the euro is quoted at 1.3000
euros per dollar
• Suppose that the pound is quoted at 2.5000
euros per pound
• Trade 1 dollar for 1.3 euros. Trade 1.3 euros
for 1.3/2.5 = .52 pounds. Trade for more than
1 dollar and make a profit.