Lecture Class_7_intro To Forex Market

Module : 2 Session 1: The Foreign Exchange or FOREX Market

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Foreign Exchange Market 1. History of Foreign Exchange a. Gold Standard b. Agreements on Fixed Exchange Rates c. Floating Exchange Rate System

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Classic Gold Standard For example, if the dollar is pegged to gold at U.S.$30 = 1 ounce of gold, and the British pound is pegged to gold at £6 = 1 ounce of gold, it must be the case that the exchange rate is determined by the relative gold contents:

$30 = £6 $5 = £1

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Fixed Exchange Rates System Bretton Woods System

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Foreign Exchange Market 2. Foreign Exchange Transaction a. Spot Market - OTC Market. Daily Volume - $2Trillion Traded like an asset class such as Equities and Bonds

Key Trading Centers: A) ASIA - Sydney, Singapore, Hong-Kong, Tokyo. B) EUROPE – Zurich, Frankfurt, Paris, Amsterdam and London. C)N.America – New York, Toronto, San Francisco and Los Angeles b. Spot Market Time Zones c. Forex Market Participants 5

Forex Trading Hours Forex market operates globally 24-hours a day, starting from the far east, in New Zealand (Wellington), passing the time zones in Sydney, Tokyo, Hong Kong, Singapore, Frankfurt , London, then finishing the day in New York and Los Angeles

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Forex Market Participants 

Worldwide linkages of International bank currency traders and their customers, nonbank dealers, FX brokers, and central banks connected to one another by network of telephones, electronic computer terminals (ECT) and Automated Dealing Systems (ADS)

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The FX market is a two-tiered market: 1. Interbank Market (Wholesale) About 700 banks worldwide stand ready to make a market in foreign exchange accounting for 55% of the market Nonbank dealers account for about 30% of the market. 2. Client Market (Retail) accounting for 15% market share. Major Players: UBS, DB, Citigroup, JP Morgan, RBS, Barclays 7

FOREX Market Trading Systems  International

commercial banks communicate with one another with: 

SWIFT: The Society for Worldwide Interbank Financial Telecommunications.

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CHIPS: Clearing House Interbank Payments System

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ECHO Exchange Clearing House Limited, the first global clearinghouse for settling interbank FX transactions.

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Foreign Exchange Quotations a Bid/Ask Spread of Banks b. Factors that Affect the Spread Spread = f (Order cost, inventory cost, competition, volume, currency risk) Example from www.oanda.com 9

Interpreting Foreign Exchange Quotations 1. Direct versus Indirect Quotes: The Direct Quote: is the units local currency (Rupees) per unit of foreign currency e.g. $ 1 = Rs 47 The Indirect Quote: is the units of foreign currency per unit of local currency (Rupees) e.g. Rs 1 = $.0212 The concept of appreciation in direct and indirect quotes 2. Cross Exchange Rates

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