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Forex in the Future: Implications for Cash Management

Association of Financial Planners February 12, 2002. Forex in the Future: Implications for Cash Management. Campbell R. Harvey Duke University, Durham, NC USA National Bureau of Economic Research, Cambridge MA USA http://www.duke.edu/~charvey. Forex in the Future: -----Current landscape.

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Forex in the Future: Implications for Cash Management

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  1. Association of Financial Planners February 12, 2002 Forex in the Future: Implications for Cash Management Campbell R. Harvey Duke University, Durham, NC USA National Bureau of Economic Research, Cambridge MA USA http://www.duke.edu/~charvey

  2. Forex in the Future:-----Current landscape Market $1.500 trillion in forex transacted every day* $0.020 trillion stocks transacted on NYSE *Does not include forwards, swaps, and options!

  3. Forex in the Future:-----Current landscape Trading Basic technology has not changed in decades • Phone around to banks/investment banks and get a quotation • Take the best price

  4. Forex in the Future:-----Trading technology Trading Basic technology has not changed in decades • Phone around to banks/investment banks and get a quotation • Take the best price

  5. Forex in the Future:-----Trading cost Components • Clearing fee (say on 1 million €) $9-25 • Bid-ask spread largest component • 90% of the time 2-5 pips ($200-500) • median is 5 pips

  6. Forex in the Future:-----Trading cost Frequency in %

  7. Forex in the Future:-----Trading cost Why are trading costs so high? Banks provide: • Clearing • Credit monitoring • Bear inventory risk Plus, they make a pile of money!

  8. Forex in the Future:-----New forces in the market Two consoritia: FXall and Atriax Similar product, different partners • Using the Internet, press a button and get the best two way quote (bid-ask) from consortia members • FXall has been around one year • Atriax launched in July 2001

  9. Forex in the Future:-----New forces in the market Two consoritia: FXall and Atriax Advantages: • Saves time in doing phone around • Electronic execution

  10. Forex in the Future:-----New forces in the market Two consoritia: FXall and Atriax Disadvantages: • Does not necessarily reduce spread cost • Makes collusion among consortium partners a possibility (current DOJ investigation) • No cross quotes between the two consortia Basically, it is the same old market facilitated with the Internet

  11. Forex in the Future:-----New forces in the market Reverse auction Forexster.com • Applied for several patents for a reverse auction type of system for FX trading • Two types of systems • Type 1 client communicating to many banks • Type 2 many clients communicating with bank

  12. Type 1 unit Bank 1 Bank 2 Client Forexster Bank 3 Bank 4 Bank 5

  13. Type 1 unit Bank 1 Reverse auction Bank 2 Client Forexster Bank 3 Bank 4 Bank 5

  14. Type 2 unit Client 1 Client 2 Client 3 Client 4 Forexster Bank Client 5 Client 6 Client 7 Client 8 Client 9

  15. Type 2 unit Client 1 Client 2 Client 3 Client 4 Forexster Direct trade Bank Client 5 Client 6 Client 7 Client 8 Client 9

  16. Type 2 Type 1 Bank Client

  17. Forex in the Future:-----New forces in the market Further reading Ben Wright, “Unlocking the C2C forex riddle” Euromoney on-line, July 25, 2001

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