Asset Class

Foreign Exchange
Instruments
Spot
Outward forward trades
Currency options
Currency futures
Foreign exchange swaps
Non-deliverable forwards

Unique market because of its trading volume, its extreme liquidity of the market, the
large number of, and variety of, traders in the market, it’s geographical dispersion
Its long trading hours – 24 hours a day (except weekends) and the variety of factors
that affect exchange rates.

Average daily international foreign exchange trading volume was $1.9 trillion in April
2004 according to the Bank of International Settlements study. The Breakdown is as
follows.

$600 billion pot

$1300 billion in derivatives i.e.
$200 billion in foreign exchange swaps
$100 billion in currency options.

Trading characteristics

No unified market owing to the Over-the-counter (OTC) nature of currency of the

markets. Where there are different rates.

Foreign exchange markets fluctuations are usually caused by the actual monetary
flows as well as by expectations of changes in monetary flows caused by changes in
GDP, growth, inflation, interest rates, budget and trade deficits or surpluses, and other
macroeconomic conditions.

Currencies are traded against one other.

Market Participants

Strictly inter-dealer i.e. interbank) for 53%

For 33% involved a dealer (i.e. a bank) and a fund manager or some other non-bank
financial institutions
For only 14% were between a dealer and a non-financial company

Fixed Income
Definition if you borrow money and have to pay once a month interest then you have
issued a fixed income security.
Mostly these types of departments engage in bond trading, but some trade in money
market instruments.

The Money Market is for short term borrowing and lending, typically up to one year,
such as certificates of deposit (CDs) or enter into agreements such as repurchase
agreements (repos). It provides short to medium term liquidity in the global financial
system.

Bonds

A bond is a debt security in which the issuer owes the holder and is obliged to repay
the principal and interest (the coupon). There might be other stipulations, like
information or limitations to behaviour of the issuer. Bonds are normally issued for
more than 1 year. Bonds and stocks (equity) are both securities, but the difference is
that stock holders own a part of issuing company (have an equity stake), whereas
bond holders are in essence lenders to the issuer. Bonds have a definite life span, their
maturity, whereas stocks may be held indefinitely.

Trading Characteristics

UK, France and Germany, government bonds are listed in the local stock exchange. In
these and most countries including US, government bonds are traded on over-the-
counter (OTC) markets. Their prices are displayed on screen based information
services such as Bloomberg and deals are contracted over the phone or electronic
communication.

Market size

Largest market in the world is the US government debt, followed by the government
bonds in Japan, Italy and Germany.

Issuers