Forex

The Forex Exchange Market

1. Function and Structure of Foreign Exchange Market

• FX Market Participants

• Correspondent Banking Relationship

2. The Spot Market

• Spot Rate Quotations

• Cross-Exchange Rate Quotations

• Alternative Expression for the Cross-Exchange Rate

• The Bid-Ask Spread

1. Function and Structure of Foreign Exchange Market

The main definition of foreign exchange (FX) market is the change of buying power from one currency into another. It also includes: bank deposit of foreign currency, the extension of credit denominated in foreign currency, foreign trade financing, trading of foreign currency options and future contracts and currency swap (Sabherwal, 2012)

The opening hours in Foreign Exchange Market as a global market for financial trade is 24 hours a day, 7 days a week, 365 days a year. As it is always open, transactions are influenced by the open markets, depending on markets world locations.

Graph 1.1

(Sabherwal, 2012)

As we can see in the (graph 1.1), when Europe is coming in the trade increase dramatically up to almost 45000 electronic conversations per hour, and later around 9am in Europe, Asia close down, the trade decline from its peak. But, again, when USA open their Financial Institution, the electronic conversations increase and, on the end of the day, when Europe and USA are closing, transactions are decreased to the minimum.

• FX Market Participants

The market can be divided into two parts: whole sale or interbank market, and retail or client market. The participants in Foreign Exchange Market are residents of all over the world. It can be governments, huge multinational companies, national companies, and even private persons. If we want to be more specific, we can set them in five groups: international banks, bank customers, nonbank dealers, FX brokers, and central banks (Sabherwal, 2012). Their participation in the huge FX marked may vary. Commercial Banks are the main link...