Function and Structure of Forex Market

Foreign Exchange Market
Chapter Outline
 Function and Structure of the FOREX Market
 The Spot Market
 The Forward Market
Chapter Outline
 FX Market Participants
 The Spot Market
.
Chapter Outline
 The Spot Market
 Spot Rate Quotations
 The Bid-Ask Spread
 Spot FX Trading
 Cross Exchange Rate Quotations
Chapter Outline
 The Spot Market
 Forward Rate Quotations
 Long and Short Forward Positions
 Forward Cross-Exchange Rates
.
Foreign Exchange Market-Defined
 Foreign exchange means the money of a foreign country; that is foreign country
bank balances,cheques,drafts and banknotes.
 A foreign exchange transaction is an agreement between a buyer and a seller that a
fixed amount of currency will be delivered for some other currency at a specified
rate.
 That is the market where one currency is traded for another.
 Huge Market
 Foreign exchange market:Avg traded value exceeds $1.9 trillion per day and
includes all of the currencies of the world

 Competitive and Efficient
 Many Participants
 Large Commercial Banks

 Foreign Exchange Brokers
 Multinational Corporations
 Central Banks
General Features
 The Exchange Market
 All over the globe
 24 hours a day
 Most transactions are channelized through the world-wide
interbank market-the market where banks trade with each

other(multiples of $1Million US or equivalent in transaction
size)
 The client or retail market(specific ,small amount)
• Individuals and Firms
• Speculators and arbitragers
• Foreign exchange brokers
• Central Bank and treasuries
General Features
 The Foreign Exchange Market
 an electronically linked network of banks, foreign
exchange brokers and dealers who bring together buyers

and sellers of currencies
 Historically
• Telephone
• Telex
 Today
• Electronically Brokering
Financial Centres
 London
 New York
 Tokyo
 Zurich
 Frankfurt
 Hong Kong
 Singapore
 Paris
 Sydney
spanning most time zones
Factors For Development
 Growth in International Trade
 Regulation and control for cross-border capital
flows and exchange rates have decreased.
 Huge cross-border FDI
 International portfolio investments
 Arbitrage
 Speculation
 Hedging
Exchange Rate
 The rate at which one currency is traded for
another currency.
 FOREX Market Participants
 Correspondent Banking Relationships
FOREX Market Participants
 The FOREX market is a two-tiered market:
 Interbank Market (Wholesale)
 About 700 banks worldwide stand ready to make a market in
Foreign exchange.
 Nonbank dealers account for about 20% of the market.
 Client Market (Retail)
 Market participants include international banks,
their customers, nonbank dealers, FOREX
brokers, and central banks.
Correspondent Banking Relationships
 Large commercial banks maintain demand deposit
accounts with one another which facilitates the efficient
functioning of the forex market.
 International commercial banks communicate with one
another with:
 SWIFT: The Society for Worldwide Interbank Financial
Telecommunications.
 CHIPS: Clearing House Interbank Payments System
 ECHO Exchange Clearing House Limited, the first global
clearinghouse for settling interbank FOREX transactions.
.
The Spot Market
 Spot Rate Quotations
 The Bid-Ask Spread
 Cross Rates
Spot market
 The spot market or cash market is a commodities or securities
market in which foreign exchange are bought and sold and
delivered immediately.
 Spot Forex
• The spot foreign exchange market has a 2 day delivery
date(excluding holidays of buyer or seller), originally due to
the time it would take to move cash from one bank to another.
 Denoted by S(.) where S is the relationship between 2 currencies
,e.g. S(Rs/$)=Rs 75.10/$ means
 1 dollar = Rs.75.10
(therefore market for purchase or sale of currencies for immediate
delivery is called the spot market)
Quotations at The Foreign Exchange Market
 A quotation is the amount of a currency necessary

to buy or sell a unit of another currency.
 Expressed in currency terms it is called outright
rate e.g. S(Rs./$)=Rs. 75.10 is an outright rate
between Rs. and $
 Quotes=‘buy’ and ‘sell’ OR ‘bid’ and ‘ask’ rates
 Example:-
Buying Rs.75.10/$ Selling 76.35/$
Direct and Indirect Quotes
 Direct Quote: A unit of foreign currency quoted in terms of

domestic currency.
Example:-
At New York exchange market the Euro is quoted as:
Spot(bid) =$2.4000/Euro
Spot(ask) =$2.4017/Euro
 Indirect Quote: A unit of domestic currency quoted in terms of
foreign currency.
Example:
London foreign Exchange Market
Spot(bid)=$3.0201/BP Spot(Ask)=$3.0180/BP
Relationships Between Bid and Ask prices of the currencies
 There are two sides of all quotes:

 Buy and sell(buy dollars against Rs. Sell dollars
for Rs.)
 Example: PNB Spot(Rs./$)(bid/ask)=
Rs. 74.0010/74.0015 /$
Spread
 Ask and Bid differential is called Spread.

 When quotes are direct:
SPREAD=ASK-BID
Example:
Spread bid price of dollar at spot S(Rs./bid$)=75.7621
and the ask price is S(Rs./Ask$)=75.8024
Therefore the spread is ?
Rs.0.0403
Spot Rate Quotations
Currency
Wednesday, January 8, 1997 U.S. $ equiv. per U.S. $
EXCHANGE RATES
The direct
Country W ed. Tues. W ed. Tues.
Japan (Yen) .008639 .008681 115.75 115.20
The New York foreign exchange selling rates below apply to 30-Day Forward .008676 .008718 115.26 114.71
trading among banks in amounts of $1 million and more, as quoted 90-Day Forward .008750 .008791 114.28 113.76
at 4 p.m. Eastern time by Dow Jones Telerate Inc. and other sources. 180-Day Forward .008865 .008907 112.80 112.28
quote for
Retail transactions provide fewer units of foreign currency per Jordan (Dinar) 1.4075 1.4075 .7105 .7105
dollar. Kuwait (Dinar) 3.3367 3.3389 .2997 .2995
Currency Lebanon (Pound) .0006445 .0006445 1551.50 1551.50
U.S. $ equiv. per U.S. $ Malaysia (Ringgit) .4018 .4002 2.4885 2.4990
Country W ed. Tues. W ed. Tues. Malta (Lira) 2.7624 2.7701 .3620 .3610
British
Argentina (Peso) 1.0012 1.0012 .9988 .9988 Mexico (Peso) .... .... .... ....
Australia (Dollar) .7805 .7902 1.2812 1.2655 Floating rate .1278 .1277 7.8220 7.8330
Austria (Schilling) .09043 .09101 11.058 10.988 Netherland (Guilder) .5655 .5699 1.7685 1.7547
Bahrain (Dinar) 2.6525 2.6525 .3770 .3770 New Zealand (Dollar) .7072 .7106 1.4140 1.4073
Belgium (Franc) .03080 .03105 32.470 32.205 Norway (Krone) .1540 .1548 6.4926 6.4599
Pakistan (Rupee) .02529 .02529 39.540 39.540
pound is:
Brazil (Real) .9607 .9615 1.0409 1.0401
Britain (Pound) 1.6880 1.6946 .5924 .5901 Peru (new Sol) .3814 .3840 2.6218 2.6039
30-Day Forward 1.6869 1.6935 .5928 .5905 Philippines (Peso) .03800 .03802 26.318 26.300
90-Day Forward 1.6843 1.6910 .5937 .5914 Poland (Zloty) .3460 .3475 2.8900 2.8780
180-Day Forward 1.6802 1.6867 .5952 .5929 Portugal (Escudo) .006307 .006369 158.55 157.02
Canada (Dollar) .7399 .7370 1.3516 1.3568 Russia (Ruble) (a) .0001787 .0001788 5595.00 5594.00
30-Day Forward .7414 .7386 1.3488 1.3539 Saudi Arabia (Riyal) .2666 .2667 3.7503 3.7502
90-Day Forward .7442 .7413 1.3437 1.3489 Singapore (Dollar) .7116 .7124 1.4053 1.4037
£1 = $1.688
180-Day Forward .7479 .7450 1.3370 1.3422 Slovak Rep. (Koruna) .03259 .03259 30.688 30.688
Chile (Peso) .002352 .002356 425.25 424.40 South Africa (Rand) .2141 .2142 4.6705 4.6690
China (Renminbi) .1201 .1201 8.3272 8.3276 South Korea (W on) .001184 .001184 844.75 844.65
Colombia (Peso) .0009985 .0009985 1001.50 1001.50 Spain (Peseta) .007546 .007603 132.52 131.53
Czech. Rep (Krouna) .... .... .... .... Sweden (Krona) .1431 .1435 6.9865 6.9697
Commercial rate .03662 .03677 27.307 27.194 Switzerland (Franc) .7334 .7387 1.3635 1.3537
Denmark (Krone) .1663 .1677 6.0118 5.9633 30-Day Forward .7357 .7411 1.3593 1.3494
Ecuador (Sucre) .... .... .... .... 90-Day Forward .7401 .7454 1.3511 1.3416
Floating rate .0002766 .0002787 3615.00 3587.50 180-Day Forward .7470 .7523 1.3386 1.3293
Finland (M arkka) .2121 .2135 4.7150 4.6841 Taiwan (Dollar) .03638 .03637 27.489 27.493
France (Franc) .1879 .1893 5.3220 5.2838 Thailand (Baht) .03902 .03906 25.625 25.605
30-Day Forward .1882 .1896 5.3126 5.2741 Turkey (Lira) .00000911 .00000915 109755.00 109235.00
90-Day Forward .1889 .1903 5.2935 5.2558 United Arab (Dirham) .2723 .2723 3.6720 3.6720
180-Day Forward .1901 .1914 5.2617 5.2243 Uruguay (New Peso) .... .... .... ....
Germany (M ark) .6352 .6394 1.5744 1.5639 Financial .1145 .1145 8.7300 8.7300
30-Day Forward .6364 .6407 1.5714 1.5607 Venezuela (Bolivar) .002098 .002096 476.70 477.12
90-Day Forward .6389 .6432 1.5652 1.5547 ---
180-Day Forward .6430 .6472 1.5552 1.5450 SDR 1.4315 1.4326 .6986 .6980
Greece (Drachma) .004049 .004068 246.98 245.80 ECU 1.2308 1.2404 .......... ...........
Hong Kong (Dollar) .1292 .1292 7.7390 7.7390
Hungary (Forint) .006139 .006164 162.89 162.23 Special Drawing Rights (SDR) are based on exchange rates for
India (Rupee) .02787 .02786 35.875 35.890 the U.S., German, British, French, and Japanese currencies. Source:
Indonesia (Rupiah) .0004233 .0004233 2362.15 2362.63 International Monetary Fund.
Ireland (Punt) 1.6664 1.6714 .6001 .5983 European Currency Unit (ECU) is based on a basket of com munity
Israel (Shekel) .3079 .3085 3.2474 3.2412 currencies.
Italy (Lira) .0006483 .0006510 1542.50 1536.00 a-fixing, M oscow Interbank Currency Exchange.
.
Currency
EXCHANGE RATES
The indirect
Country W ed. Tues. W ed. Tues.
Japan (Yen) .008639 .008681 115.75 115.20
quote for
British
Australia (Dollar) .7805 .7902 1.2812 1.2655 Floating rate .1278 .1277 7.8220 7.8330
Pakistan (Rupee) .02529 .02529 39.540 39.540
pound is:
Brazil (Real) .9607 .9615 1.0409 1.0401
Britain (Pound) 1.6880 1.6946 .5924 .5901 Peru (new Sol) .3814 .3840 2.6218 2.6039
£.5924 = $1
90-Day Forward .6389 .6432 1.5652 1.5547 ---
180-Day Forward .6430 .6472 1.5552 1.5450 SDR 1.4315 1.4326 .6986 .6980
Hong Kong (Dollar) .1292 .1292 7.7390 7.7390
Currency
EXCHANGE RATES Country W ed. Tues. W ed. Tues.
Note that
Japan (Yen) .008639 .008681 115.75 115.20
the direct
Floating rate .1278 .1277 7.8220 7.8330
quote is the
Australia (Dollar) .7805 .7902 1.2812 1.2655
Brazil (Real) .9607 .9615 1.0409 1.0401 Pakistan (Rupee) .02529 .02529 39.540 39.540
Peru (new Sol) .3814 .3840 2.6218 2.6039
reciprocal of
Britain (Pound) 1.6880 1.6946 .5924 .5901
the indirect
quote:
Taiwan (Dollar) .03638 .03637 27.489 27.493
1
Finland (M arkka) .2121 .2135 4.7150 4.6841
Turkey (Lira) .00000911 .00000915 109755.00 109235.00
1.688 
30-Day Forward .1882 .1896 5.3126 5.2741
.5924
90-Day Forward .6389 .6432 1.5652 1.5547 ---
180-Day Forward .6430 .6472 1.5552 1.5450 SDR 1.4315 1.4326 .6986 .6980
Hong Kong (Dollar) .1292 .1292 7.7390 7.7390
The Bid-Ask Spread
 The bid price is the price a dealer is willing to pay
you for something.
 The ask price is the amount the dealer wants you
to pay for the thing.
 The bid-ask spread is the difference between the
bid and ask prices.
Spot Market
The Forward Market
 Forward Rate Quotations
 Long and Short Forward Positions
 Forward Cross Exchange Rates
 Forward Premium
.
Forward Market
 A forward contract between a  Therefore the market where the

bank and a customer calls for purchases and sales of currencies
delivery are a fixed future date of are contracted in the present for
a specified amount of fixed receipts and delivery in future is
currency against another at an called the Forward Market.
exchange rate fixed at the time of
the contract
 The contract is binding-both  Forward Exchange Rates are

parties must fulfill the contract determined by forward demand and
regardless of what the exchange forward supply of various
rate is at the time of the exchange currencies.e.g.
specified in the contract.
Quotations Of Forward Rates
 Delivery of the currencies is to take place after

some-time(30 days,60 days or 90 days)
 Quotations are in the form of bid and ask.
Premium and Discount In the Forward Market
 Forward Premium: A foreign currency is said to be at a

forward premium if its future value exceeds its present
value in terms of domestic currency .
 Example: Spot(Rs/$)=Rs. 75.70/$ and three month forward
is F(Rs/$)=Rs. 76.90 dollar is at premium and Rs is at discount.
 Forward Discount: A foreign currency is said to be at a
forward discount if its future is lower than its present
value in terms of domestic currency .
 Example: Spot(Rs/$)=Rs. 75.70/$ and three month forward
is F(Rs/$)=Rs. 74.90 dollar is at discount and Rs is at premium.
A Forward Contract
Currency
EXCHANGE RATES Country W ed. Tues. W ed. Tues.
Clearly the
Japan (Yen) .008639 .008681 115.75 115.20
market
Floating rate .1278 .1277 7.8220 7.8330
participants
Australia (Dollar) .7805 .7902 1.2812 1.2655
Brazil (Real) .9607 .9615 1.0409 1.0401 Pakistan (Rupee) .02529 .02529 39.540 39.540
Peru (new Sol) .3814 .3840 2.6218 2.6039
expect that
Britain (Pound) 1.6880 1.6946 .5924 .5901
the yen will

be worth
MORE in
dollars in
90-Day Forward .6389 .6432 1.5652 1.5547 ---
180-Day Forward .6430 .6472 1.5552 1.5450 SDR 1.4315 1.4326 .6986 .6980
six months.
Hong Kong (Dollar) .1292 .1292 7.7390 7.7390

Function and Structure of Forex Market

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Function and Structure of Forex Market

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Foreign Exchange Market

includes all of the currencies of the world

 Large Commercial Banks

 Most transactions are channelized through the world-wide

interbank market-the market where banks trade with each

exchange brokers and dealers who bring together buyers

 A quotation is the amount of a currency necessary

 Direct Quote: A unit of foreign currency quoted in terms of

 There are two sides of all quotes:

 Ask and Bid differential is called Spread.

 A forward contract between a  Therefore the market where the

 The contract is binding-both  Forward Exchange Rates are

 Delivery of the currencies is to take place after

 Forward Premium: A foreign currency is said to be at a

the yen will

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