The Foreigh Exchange Market
The exchange rate
The trading of currency and bank deposits denominatedin particular currencies takes place here
Participants in the Forex
The largest money central banks
Maintain large investories of key foreign currencies
Trade currencies with each other through an ecxhange of deposits
Headquartred in NYC, Tokyo, London and other financial world centres
Kinds of exchange rate transactions
Techniques so deal with currency risk
Professional traders may take advaneage of the arbitrage opportunity
Dealers and brokers usually qote not one? but two echange rates for each pair of currencies: a bid (buy) price and an ask (sell) price
Forward
Spot
Settlement is usually within one or two business days
An agreement to deliver a specified amount at a set price on some value date within 1,2,3,6 or 12 months
Currency swaps
Currency futures contracts
Currency options
It`s an agreement between two parties to excange two currencies at a certain exchange rate at a certain time in the future
It is a contract that garanties the holder`s right, but not the obligation? to buy or sell currency at a specified exchange rate during a specified period of time
It is a future contract to exchange one currency for another on a specified date in the future at a price (exchange rate) that is fixed on the purchase date
The largest financial market in the market
Also known as the "Forex" or "FX" market
Considered an ower-the-counter or "interbank" market
Consist of two tiers: the interbank or wholesale market, and the client or retail market
The central institutions are commercial banks
Dealers
Make profit from buying foreing exchange at a bid price and reseling it in higher ask price
Can be bank or non-bank institutions
Operate in both the interbank and client market
Participants in commercial and investment transactions
Importeters and exporters international portfolio investors multinational firms
Use the foreigh exchange market to taclitate execution of commercial or investment transactions
Use the foreigh exchange market to hedge foreigh exchange risks
Speculators
make profit from exchange rates changes
Arbitrages
Central banks and tresuares
Brokers