FOREIGN Exchange MARKET

VAISHALI SHARMA

T h e Fo re i n E xch a n g e M a rke t, o r " Fo rex " m a rke t, i g s

w h e re th e m a j ri o f b u yi g a n d se l i g o f w o rl o ty n ln d cu rre n ci s ta ke s p l ce . e a


It is by far the largest market in the world, in

terms of cash value traded, and includes trading between large banks, central banks, currency speculators, multinational corporations, governments, and other financial markets and institutions.

The trade happening in the forex markets across the globe currently exceeds $1.9 trillion/day (on average). The very large commercial banks are the major traders in this market Retail traders (small speculators) are a small part of this market. The five major centers of Forex trading, are based in London, New York, Zurich, Frankfurt and Tokyo .

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The Forex market itself consists of a worldwide network

of primarily interbank traders connected by telephone lines and computers. another and the resulting market bid/ask price for a particular currency is then fed into computers and displayed on official quote screens. to as Interbank Rates.

 FX traders constantly negotiate prices between one

 Forex exchange rates quoted between banks are referred

The foreign exchange market is unique because

of:

its

trading volume, the large number of, and variety of, traders in the market, its geographical dispersion, its long trading hours - 24 hours a day (except on weekends). the variety of factors that affect exchange rates.

THE ADVANTAGES MARKET

OF THE FOREIGN

The daily volume of business dealt with on the

foreign exchange markets in 1998 was estimated to be over $2.5 trillion dollars. (Daily volume on New York Stock Exchanges is about $20 billion) Today (2006) it may be about $5 trillion dollars. Until recently, this market was used mostly by banks, who fully appreciated the excellent opportunities to increase their profits. Today, it is accessible to any investor enabling him to diversify his portfolio.

The emergence of Yen as a major currency, and

new Euro, in addition to the Dollar beside many other currencies, and the frequent fluctuations in relative value of these currencies provide a great opportunity to generate substantial profits. The foreign exchange market operates 24 hours a day permitting intervention in the major international foreign exchange markets at any point in time

Market Participants Banks
Commercial companies Central Banks Investment Management Firms Hedge Funds

BANKS
The interbank market caters for

both the majority of commercial turnover and large amounts of speculative trading every day. A large bank may trade billions of dollars daily. Some of this trading is undertaken on behalf of customers, but much is conducted by proprietary desks, trading for the bank's own account.

Commercial companies
An important part of this market

comes from the financial activities of companies seeking foreign exchange to pay for goods or services. fairly small amounts compared to those of banks or speculators, and their trades often have little short term impact on market rates.

 Commercial companies often trade

Nevertheless, trade flows are

an important factor in the long-term direction of a currency's exchange rate. Some multinational companies can have an unpredictable impact when very large positions are covered due to exposures that are not widely known by other market participants.

Central banks
National central banks play an

important role in the foreign exchange markets. They try to control the money supply, inflation, and/or interest rates and often have official or unofficial target rates for their currencies. They can use their often substantial foreign exchange

Milton Friedman argued that the best

stabilization strategy would be for central banks to buy when the exchange rate is too low, and to sell when the rate is too high — that is, to trade for a profit based on their more precise information. Nevertheless, the effectiveness of central bank "stabilizing speculation" is doubtful because central banks do not go bankrupt if they make large losses, like other traders would, and there is no convincing evidence that they do make a profit trading. 

Investment management firms

Investment management firms (who typically

manage large accounts on behalf of customers such as pension funds and endowments) use the foreign exchange market to facilitate transactions in foreign securities. For example, an investment manager with an international equity portfolio will need to buy and sell foreign currencies in the spot market in order to pay for purchases of foreign equities. Since the forex transactions are secondary to the actual investment decision, they are not seen as speculative or aimed at profit-maximisation.

Hedge funds
Hedge funds, such as George Soros's

Quantum fund have gained a reputation for aggressive currency speculation since 1990. They control billions of dollars of equity and may borrow billions more, and thus may overwhelm intervention by central banks to support almost any currency, if the economic fundamentals are in the hedge funds' favor .

Currency
A currency is a unit of exchange,

facilitating the transfer of goods and services. It is a form of money, where money is defined as a medium of exchange A currency zone is a country or region in which a specific currency is the dominant medium of exchange. To facilitate trade between currency zones, there are exchange rates i.e. prices at which currencies (and the goods and services of individual currency zones) can be exchanged against each other. Currencies can be classified as either floating currencies or fixed currencies based on their

Exchange Rates

In finance, the exchange rate (also known as

the foreign - exchange rate, forex rate or FX rate) between two currencies specifies how much one currency is worth in terms of the other. For example an exchange rate of 120 Japanese yen (JPY, ¥) to the United States dollar (USD, $) means that JPY 120 is worth the same as USD 1. The foreign exchange market is one of the largest markets in the world. By some estimates, about 2 trillion USD worth of currency changes hands every day. 1 Quotations 2 Free or pegged 3 Nominal and real exchange rates 4 Fluctuations in exchange rates 5 Foreign exchange markets

Trading Characteristics
There is no single unified foreign

exchange market. The main trading centres are London, Tokyo and Newyork, but banks throughout the world participate. Exchange rate fluctuations are usually caused by changes in inflation, GDP growth, interest rates, budget and trade deficits and surpluses.

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