The Foreign Exchange Market or Forex
Essay by 胖 小 • January 11, 2019 • Course Note • 5,430 Words (22 Pages) • 696 Views
The Foreign Exchange Market. Chap 1
FOREX is the short of FOReign
EXchange.
Definition:
It’s a market in which the money of one country is exchanged against the money of another country.
Foreign Exchange transaction :
A foreign exchange transaction is an agreement between a buyer and a seller that a fixed amount of one currency will be delivered for some other currency at a specified rate
Characteristics of the FOREX
FOREX does not exist physically (OverThe-Counter market): it is a network in which participants are connected by computers and telephones.
The four most liquid currency pairs traded
in the world are:
EUR/USD (euro/US dollar)
USD/JPY (US dollar/Japanese yen)
GBP/USD (British pound/US dollar)
USD/CHF (US dollar/Swiss franc)
Most exchanges of currency are made through bank deposits that are transferred electronically from one account to another.
Daily global value of FOREX trading averaged US$ 5100 billion in April 2016. (against US$ 5300 billion in April 2013 and US$ 4000 billion in April 2010)
Market participants :
• Traders: commercial banks | • Brokers: | Central banks: | Individuals and firms conducting | • Speculators and arbitragers: |
They act as market makers who quote a buy | They act as middleman between | They act to support the value of their | Importers, exporters, portfolio investors, | Speculators and arbitragers seek to profit - Speculators seek all their profit from |
There are 2 exchange rate systems:
-Fixed exchange rate system.
- Floating (or flexible) exchange rate system.
Fixed exchange rate system. | Floating (or flexible) exchange rate system. |
-A fixed exchange rate system (also known -The value of the particular currency that has been pegged to another one depends on the performance of the same, which is also known as the reference value. | In this system, the exchange rate is |
No better system . each system has his own caracteristique .
Exchange Rates:
Each country has a currency in which the prices of goods and services are quoted.
An exchange rate is the price of one currency in terms of another. This is called the nominal exchange rate.
An exchange rate can be quoted in two ways:
Difference between indirect quote and direct quote .
Direct quote ( american ) | Indirect quote (European ) |
Is a national currency price of a unit of How many units of national currency do Example US$/€ = 0.8602 | Is a foreign currency price of a unit of Example €/US$= 1.1625 |
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An appreciation of the euro against the dollar means that the price of a euro in terms of dollars has gone up
• A depreciation of the euro against the dollar means that the price of a euro in terms of dollars has gone down.
If the euro appreciates against the dollar:
The dollar depreciates against the euro. If the euro depreciates against the dollar:
The dollar appreciates against the euro.
Chap 2
Bid & Ask quotations.
Bank quotations are given as a bid and ask :
- The Bid is the price at which banks (traders) buy currencies.
- The Ask is the price at which banks (traders) sell currencies.
Banks buy at one price (Bid), and sell at a slightly higher price (Ask), making their profit from the spread between the buying and selling prices.
Spread = Ask – Bid
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