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Forex markets-structure
Largest markets in the world Over the counter market Worldwide network of inter-bank traders, mainly banks Electronic Trading systems eg. Reuters, Bridge Virtually 24 Hour market London, Tokyo, NewYork, Frankfurt, Singapore account for
way price for the currency i.e buying and selling price
which is also called the bid-offer price.
Types of transactions
Ready or Cash value today Tomorrow or tom-value tomorrow Spot transactions two business days after trade date Forward transactions- any value date beyond spot Swap transaction combination of spot and forward
QUOTING BANK :The bank that makes or quotes the price to the customer. CALLING PARTY : The customer calling for the quotes is the calling party . The calling party can be a corporate, or another bank .
Example 1: QUOTE : $ 1 = CHF 1.2750 / 55 (CHF = Swiss Franc) QUOTING PARTY : Buys USD at CHF 1.2750, sells USD at CHF 1.2755 Gets more CHF per dollar when it sells USD, Gives up fewer CHF per USD when it buys USD). CALLING PARTY : Can buy USD at the Quoting Partys offer i.e., 1.2755. Can sell USD at the Quoting Partys bid i.e., 1.2750 This is the difference between the person making the price and the person receiving the price. The calling party always faces the price and thereby the Market Spread.
1) Sometimes to save time, only the last two digits are quoted E.g., 25/30
These last decimal place figures are called PIPS, and 1.79 are called THE BIG FIGURES which move less often and hence need not be
BID RATE The rate at which the quoting party is willing to buy the COMMODITY CURRENCY( or sell the TERMS CURRENCY). OFFER OR ASK RATE The rate at which the Quoting party is willing to sell the COMMODITY CURRENCY(or buy the TERM CURRENCY). For example, if the USD/INR BID is 45.25, that means the quoting party is willing to buy dollars (the COMMODITY CURRENCY) from you, and in return sell you 45.25 rupees per dollar that he buys.
CROSS RATES : A Cross Rate is a foreign exchange rate between two currencies, via a third currency.
For e.g., CHF / JPY rate via USD : RATE SCENARIO : 1 USD = CHF 1.2725 1 USD = JPY 111.25 What is the CHF / JPY rate ? ALGEBRAICALLY, it is : CHF 1.2725 = USD 1 = JPY 111.25 Therefore, CHF = JPY 111.25 / 1.2725 i.e., CHF 1 = 87.43 JPY
Illustration 1: A British importer would like to buy CHF in terms of GBP . At what rate can he buy from the bank if the following market rates prevail? GBP 1 = USD 1.7925 - 30 USD 1 = CHF 1.2720 - 25
1.Importer sells GBP, buys USD from bank. (rate : USD 1.7925) 2.Importer sells USD, buys CHF from bank. (rate : CHF 1.2720) Algebraically, GBP 1 = USD 1.7925, USD 1 = CHF 1.2720 Therefore, GBP 1 = CHF 2.2800
Thank you