ch4 - The Market for Foreign Exchange Chapter Objective: 4...

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1 The Market for Foreign Exchange Chapter Objective: This chapter serves to introduce the student to the institutional framework within which exchange rates are determined. This chapter lays the foundation for much of the discussion throughout the remainder of the text, thus it deserves your careful attention. Chapter Outline Function and Structure of the FOREX Market The Spot Market The Forward Market 4 Chapter four
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2 FUNCTION AND STRUCTURE OF FX MARKET Dispersed broker-dealer or Over the Counter (OTC) market Size: $1.8 trillion per day US$ - most trade currency, considered the vehicle currency that expedites transactions between currencies of limited circulation UK – largest market for foreign exchange (FX) activity
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3 FOREIGN EXCHANGE ACTIVITY
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4 FOREX Market Participants The FOREX market is a two-tiered market: Wholesale (Interbank, 87% of trading volume) and Retail (Client market, 13% of market). Why so much wholesale? Much wholesale trading is speculative trading (trying to correctly judge the direction of currency values) or arbitrage trading (exploiting ex-rate discrepancies between dealers). Currency trading is a profit center for large banks. Market participants include international banks, their customers, nonbank dealers, FX brokers, and central banks.
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5 FOREX Market Participants 1. INTL BANKS and BANK CUSTOMERS. 100-200 large commercial banks worldwide provide the core of the FX market and actively participate, "make a market" in FX, trading FX on behalf of bank customers (MNCs, money managers, exporters, importers, private traders). Most interbank trades are speculative or arbitrage transactions. 2. NONBANK DEALERS. Wholesale currency traders who are NOT commercial banks, e.g. Investment banks (Solomon Smith Barney, M-L, JP Morgan, Goldman Sachs, etc.) establish their own trading centers to trade directly in the FX market, and account for 28% of the interbank (wholesale) volume.
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6 FOREX Market Participants 3. FX BROKERS. Brokers/intermediaries who track quotes offered by many dealers in the global market, and then match buyers and sellers for a fee (bid/ask spread), and "make a market," without taking a position themselves (no currency inventory).
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This note was uploaded on 01/26/2010 for the course ADMS 4542 taught by Professor Semihyildrim during the Spring '10 term at York University.

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ch4 - The Market for Foreign Exchange Chapter Objective: 4...

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