Foreign

Exchange
Market
 Tayyab Khan (043)
Murtaza Nadeem Malik (032)
Usama Asghar (037)
Hafiz Hassan Majeed (109)
Foreign Exchange
Market

Foreign Exchange
Market is that
market in which
national currencies
are traded for one
another.
International
Finance
To the ordinary person,
international finance is
synonymous with
exchange rates, and
indeed, a large part of
the study of
international finance
involves the study of
exchange rates.
 Types of Exchange Rates
1. Exchange rates for bank note
There are exchange rates for bank notes,
which are, for example, the Federal Reserve
notes with pictures of former U.S. Presidents
and the equivalent State Bank of Pakistan 1
notes displaying pictures of the Quid-e-Azam

2. Exchange Rates for cheque

There are also exchange rates between cheque Add Text 2
stating dollar amounts and those stating
depend on whether they are issued by banks
or by corporations. Exchange rates also differ
according to whether they are for the purchase
of foreign currency or for sale of foreign
currency.
 While the exchange of bank notes between
ordinary private customers and banks takes
place in the retail market, banks trade their
surpluses of notes between themselves in the
wholesale market.
Bank Note The wholesale market involves firms which
Whole specialize in buying and selling foreign bank
notes with commercial banks and currency
salers exchanges. These currency trading firms are
bank note wholesalers.

Like Khanani and Kalia, Amjad Bros, Butt

Bros
The Spot Foreign
Exchange Market
The spot exchange rate,
which is determined in the
spot market, is the number of
one currency per unit of
another currency, where
both currencies are in the
form of bank deposits.
Mudassara Mumtaz
(FA17-BBA-086)
 The interbank foreign exchange market is by
far the largest financial market on earth.

After correcting for double counting (so that

Organization a purchase by one bank and the
of corresponding sale by a second bank is
counted only once) average daily turnover is
interbank almost one trillion dollars.
Spot
Market The phenomenal size of this market can be
put in perspective by noting, for example that
foreign exchange market turnover exceeds
that of all the world’s stock markets
combined.
 SWIFT
• The foreign exchange market is an informal arrangement of the larger
commercial banks and a number of foreign exchange brokers.

• The banks and broker are linked together by telephone, telex and a
satellite communication network called the “Society for Worldwide
International Financial Telecommunications (SWIFT)”.
• This computer based communication system, based in Brussels,
Belgium, links banks and brokers in just about every financial center.

• The SWIFT network, which has been available since 1977, has grown
so rapidly that it has virtually replaced the preexisting methods of
conveying messages, namely the mail and telegraphic transfer.
• SWIFT uses satellite linkages and transmits messages between banks in
a standard format to minimize errors which can easily occur due to
different languages and banking customs.
 SWIFT
• ISO 9362 (also known as SWIFT-BIC, BIC code, SWIFT ID or
SWIFT code) is a standard format of Business Identifier Codes
approved by the International Organization for Standardization
(ISO).
• It is a unique identification code for both financial and non-financial
institutions.
• These codes are used when transferring money between banks,
particularly for international wire transfers, and also for the exchange of
other messages between banks.
• The codes can sometimes be found on account statements.
• The overlapping issue between ISO 9362 and ISO 13616 is discussed
in the article International Bank Account Number (also called
IBAN).
 Deutsche:
Deutsche Bank is an international bank,
with its head office in Frankfurt, Germany.
The SWIFT code for its primary office is
DEUTDEFF:
DEUT identifies Deutsche Bank
DE is the country code for Germany
Example FF is the code for Frankfurt

1 Deutsche Bank uses an extended code of

11 digits and has assigned branches or
processing areas individual extended
codes. This allows the payment to be
directed to a specific office. For example,
DEUTDEFF500 would direct the
payment to an office of Deutsche Bank in
Bad Homburg.
 Laiba Ali
(FA17-BBA-096)
 Nedbank
Nedbank is a primarily South African bank, with its
head office in Johannesburg. The SWIFT code for its
primary office is NEDSZAJJ:
NEDS identifies Nedbank
ZA is the country code for South Africa
Example JJ is the code for Johannesburg

2 Nedbank has not implemented the extended code of

11 digits and all SWIFT transfers to its accounts are
directed to the primary office for processing. Those
transfer interfaces that require an 11 digit code would
enter NEDSZAJJXXX.
CHIPS
• This payment generally takes place via a
clearing house.
• A clearing house is an institution at which
banks keep funds which can be moved from
one bank’s account to another’s to settle
interbank transactions.

• When foreign exchange is trading against the

U.S. dollar, the clearing house that is used is
called CHIPS, an acronym for the clearing
House Interbank Payments Systems.
• CHIPS is located in New York and, as we
shall explain below, transfer funds between
member banks.
CHIPS and others..
Financial Institution was required to maintain a branch or
an agency in New York City. A non-participant wishing to
make international payments using CHIPS was required
to employ one of the CHIPS participants to act as its
correspondent or agent.
Banks typically prefer to make payments of higher value
and of a less time-sensitive nature by CHIPS instead of
Fedwire, as CHIPS is less expensive (both by charges and
by funds required).
Fedwire: Formally known as the Federal Reserve Wire
Network, Fedwire is a Real Time Gross Settlement Funds
Transfer system operated by the Federal Reserve Banks
that enables financial institutions to electronically transfer
funds
CHAPS: the United Kingdom's equivalent to Fedwire
CHATS: Clearing House Automated Transfer System–
Hong Kong's system
 SWIFT
The latest edition is ISO 9362:2009 (dated 2009-10-01). The SWIFT code
is 8 or 11 characters, made up of:
4 letters: Institution Code or bank code.
2 letters: ISO 3166-1 alpha-2 country code
2 letters or digits: location code
• If the second character is "0", then it is typically a test BIC as
opposed to a BIC used on the live network.
• If the second character is "1", then it denotes a passive participant
in the SWIFT network
• If the second character is "2", then it typically indicates a reverse
billing BIC, where the recipient pays for the message
as opposed to the more usual mode whereby the sender pays for the
message.
3 letters or digits: branch code, optional ('XXX' for primary office
PRESENTATION
PRESENTATION
Ambreen Farooq
(FA17-BBA-067)
 Two levels on which the foreign
Levels of exchange market operates, these are:
• Direct interbank level
Foreign • Indirect level via brokers

Exchange
 Banks trade directly with each other, and
all participating banks are market makers
in the case of interbank trading.
Direct No central location of the market.
Trading is continuous.
Interbank It can be characterized as:
• Decentralized
level • Continuous
• Open bid
• Double auction market.
 Indirect broker based market can be
Indirect characterized as:
• Quasi centralized
Level • Continuous

via • Limit book or Single auction market

Broker
 Example: A commercial bank will place
an order with a broker to purchase £10
million at $ 1.5550/- .
Solution:
• The broker puts this on the books and

Bank to attempts to match the purchase order

with sell orders for pounds from other
banks.
broker • The market banks take positions on their
own behalves, and for customer, brokers
to bank deal only for others, showing callers their
best rates, called their inside spread, and
charging a commission to both buying
and selling banks.
 Central Bank

Firms Firms

Add to Text Add to Text

Exchange Broker
Bankers call foreign exchange dealers at
other banks and ask for the market. The
caller does not say whether he or she
wants to buy or to sell, nor does the caller
state the amount to be traded. Your market
in sterling, please. This means, “At what
price are you willing to buy and at what
price are you willing to sell British pounds
for U.S. dollars?
 The market makers are commercial and
investment banks that are in continuous on
their own accounts to each other, openly
quoting bid and ask exchange rates. They
trade on their own accounts to affect the
Organization inventories of currencies they hold, as well
of the as on behalf of customers. The market
making banks also place limit orders, with
Spot Foreign brokers who try to match trades between
Exchange the market makers, and charge a fee to
Market both. Central banks enter the periodically,
buying and selling to influence exchange
rates or performing transaction for the
government.
 When one bank maintains an
account at another bank, the banks
are called correspondents(this term
originates from the mail instructions
Accounts that used to be sent between such
banks).
With Commercial banks keep account at
correspondents in all major countries
banks to help their customer make payment
in these countries and to earn the
fees charge for their services.
THANK YOU