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

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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)

 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
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FOREX Market Trading Systems
 International
commercial banks communicate
with one another with:
 SWIFT: The Society for Worldwide Interbank Financial
Telecommunications.

 CHIPS: Clearing House Interbank Payments System

 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

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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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