1 / 9

FIN 476

FIN 476. The Spot Market for FOREX. Foreign Exchange Market. currencies (FOREX) are traded in a highly liquid, global market. as the FOREX market is global, it is a 24 hour market, with a new major trading centre somewhere always open.

Gideon
Download Presentation

FIN 476

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. FIN 476 The Spot Market for FOREX

  2. Foreign Exchange Market • currencies (FOREX) are traded in a highly liquid, global market • as the FOREX market is global, it is a 24 hour market, with a new major • trading centre somewhere always open • the major participants in the FOREX market are large commercial banks • who buy and sell currencies: • to meet customers needs for currencies • for proprietary trading reasons

  3. The FOREX market can be broken down into two basic parts: • Spot Market • Forward Market • We will look at the spot market right now. • The spot market is the market for immediate exchange of currencies. • “Immediate” is actually a misnomer, actual delivery of currencies which • have been traded occurs through an electronic transfer between bank • accounts two working days after the deal is made. • It is in the spot market that the current exchange rate (the spot rate) • Is determined

  4. Currency Dealers • the large, commercial banks employ currency dealers • it is these people who set exchange rates in response to supply and demand • that they see coming in through orders they receive • a dealer quotes prices at which he or she is willing to transact • the prices are posted electronically, so that the quote is disseminated • around the world to other dealers • a quote actually involves four things: a bid price, an ask price, • a bid depth and an ask depth

  5. Price Quotes • the bid and ask (or offer) prices are the price at which the dealer is • willing to buy and sell the currency, respectively • the depths are the amounts of currency up to which the dealer • guarantees the price quotes • Example: if the depth is $10,000,000 then the price quote is valid • for transactions up to that amount. More than that and the price • would have to be negotiated. • For the bid and ask prices, it will always be the case that: • BID < ASK

  6. the difference between the bid and ask (ask-bid) is the bid-ask spread • the spread is a major source of profits for dealers • dealers profit on every unit of currency they can buy and re-sell through • their quotes • they must set their quotes to try to maximize the volume of trade they • conduct, and also to balance supply and demand • Example: • On September 26, 2003 the quote between the British pound and • US dollar was: • 1.65960/66000 $US/£ This mean the bid price was 1.65960 $US/£ and the ask price was 1.66000 $US/£

  7. Note that because the quote is $US/£, the prices are actually prices for • pounds. • To derive the prices for $US, you must first invert the prices, and then • note that the bid for the pound is the ask for the $US, and the ask for the • pound is the bid for the $US Bid for £ = 1.65960 $US/£ Ask for $US = = 0.60255 £/$US Ask for £ = 1.66000 $US/£ Bid for $US = = 0.60241 £/$US The same quote can be expressed as a quote for $US as: 0.60241/55 £/$US

  8. Triangular Currency Arbitrage • currency prices are quoted in trading centres around the world by many • different dealers • What keeps these different dealers prices “in line” with each other? • if different dealers’ quotes are not consistent with each, then this • may give rise to an arbitrage opportunity • Consider traders in Bahrain, Tokyo and London (all of which are open • simultaneously at one point in the day), each quoting a different currency pair London: $US/€ Tokyo: ¥/$US Bahrain: ¥/€

  9. Say you started with $US and sold them in London for €, then sold the € in Bahrain for ¥, then sold the ¥ in Tokyo for $US • If you end up with more $US than you started with, there is an • arbitrage opportunity • You could make riskless profits instantly. • This would be called triangular currency arbitrage. • Arbitrage opportunities should not exist (for more than a few moments). • This insures that quotes around the work are consistent with each other. London: $US/€ Tokyo: ¥/$US Bahrain: ¥/€

More Related