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foreign exchange market.docx | Foreign Exchange Market | Exchange Rate

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foreign exchange market
  1 1. Introduction The foreign exchange market  ( forex , FX , or currency market ) is a global decentralized market for the trading of  currencies. The main participants in this market are the larger international banks. Financial centers around the world function as anchors of trading  between a wide range of different types of buyers and sellers around the clock, with the exception of weekends. Electronic Broking Services (EBS) and Reuters 3000 Xtra are two main interbank FX trading platforms. The foreign exchange market determines the relative values of different currencies. The foreign exchange market works through financial institutions, and it operates on several levels. Behind the scenes banks turn to a smaller number of financial firms known as “dealers,” who are actively involved in large quantities of foreign exchange trading. Most foreign exchange dealers are banks, so this behind-the- scenes market is sometimes called the “interbank market”, a lthough a few insurance companies and other kinds of financial firms are involved. Trades between foreign exchange dealers can be very large, involving hundreds of millions of dollars. Because of the sovereignty issue when involving two currencies, Forex has little (if any) supervisory entity regulating its actions. The foreign exchange market assists international trade and investment  by enabling currency conversion. For example, it permits a business in theUnited States to import goods from the European Union member states, especially Eurozone members, and  pay euros, even though its income is inUnited States dollars. It also supports direct speculation in the value of currencies, and the carry trade, speculation based on the interest rate differential between two currencies. In a typical foreign exchange transaction, a party purchases some quantity of one currency  by paying some quantity of another currency. The modern foreign exchange market began forming during the 1970s after three decades of government restrictions on foreign exchange transactions (the Bretton Woods system of monetary management established the rules for commercial and financial relations among the world's major industrial states after World War II), when countries gradually switched to floating exchange rates from the previous exchange rate regime, which remained fixed as per the Bretton Woods system. The foreign exchange market is unique because of the following characteristics:  2    its huge trading volume representing the largest asset class in the world leading to high liquidity;     its geographical dispersion;    its continuous operation: 24 hours a day except weekends, i.e., trading from 22:00 GMT on Sunday (Sydney) until 22:00 GMT Friday (New York);    the variety of factors that affect exchange rates;     the low margins of relative profit compared with other markets of fixed income; and    the use of  leverage to enhance profit and loss margins and with respect to account size. As such, it has been referred to as the market closest to the ideal of  perfect competition, notwithstanding currency intervention  by central banks.  According to the Bank for International Settlements, [3]  the preliminary global results from the 2013 Triennial Central Bank Survey of Foreign Exchange and OTC Derivatives Markets Activity show that trading in foreign exchange markets averaged $5.3 trillion per day in April 2013. This is up from $4.0 trillion in April 2010 and $3.3 trillion in April 2007. FX swaps were the most actively traded instruments in April 2013, at $2.2 trillion per day, followed by spot trading at $2.0 trillion. According to the Bank for International Settlements, [4]  as of April 2010, average daily turnover in global foreign exchange markets is estimated at $3.98 trillion, a growth of approximately 20% over the $3.21 trillion daily volume as of April 2007. Some firms specializing on foreign exchange market had put the average daily turnover in excess of US$4 trillion. [5]  The $3.98 trillion break-down is as follows:    $1.490 trillion in spot transactions    $475 billion in outright forwards    $1.765 trillion in foreign exchange swaps    $43 billion currency swaps    $207 billion in options and other products  3 2. History Ancient Currency trading and exchange first occurred in ancient times. [6]  Money-changing people,  people helping others to change money and also taking a commission or charging a fee were living in the times of the Talmudic writings (  Biblical times ). These people (sometimes called kollybistẻs ) used city -stalls, at feast times the temples Court of the Gentiles instead. [7]  Money-changers were also in more recent ancient times silver-smiths and, or, gold-smiths. During the fourth century the Byzantium government kept a monopoly on the exchange of currency. Currency and exchange was also a crucial element of trade in the ancient world so that  people could buy and sell items like food, pottery and raw materials.  [10]  If a Greek coin held more gold than an Egyptian coin due to its size or content, then a merchant could trade fewer Greek gold coins for more Egyptian ones, or for more material goods. This is why the vast majority of world currencies are derivatives of a universally recognized standard like silver and gold. Medieval and later During the fifteenth century the Medici family were required to open banks at foreign locations in order to exchange currencies to act for  textile merchants. [11][12]  To facilitate trade the bank created the  nostro  (from Italian translated  –    ours ) account book which contained two columned entries showing amounts of foreign and local currencies, information  pertaining to the keeping of an account with a foreign bank . [13][14][15][16]  During the 17 th  (or 18 th  ) century Amsterdam maintained an active forex market. [17]  During 1704 foreign exchange took place between agents acting in the interests of the nations of England and Holland. Early modern    4 The firm  Alexander Brown & Sons  traded foreign currencies exchange sometime about 1850 and were a leading participant in this within U.S.A. [19]  During 1880 J.M. do Espírito Santo de Silva (Banco Espírito e Comercial de Lisboa) applied for and was given permission to  begin to engage in a foreign exchange trading business. [20][21]  1880 is considered by one source to be the beginning of modern foreign exchange, significant for the fact of the beginning of the gold standard during the year . [22]  Prior to the first world war there was a much more limited control of international trade. Motivated by the outset of war countries abandoned the gold standard monetary system. [23]   Modern to post-modern From 1899 to 1913, holdings of countries' foreign exchange increased at an annual rate of 10.8%, while holdings of gold increased at an annual rate of 6.3% between 1903 and 1913. At the time of the closing of the year 1913, nearly half of the world's foreign exchange was conducted using the Pound sterling. [25]  The number of foreign banks operating within the  boundaries of London increased in the years from 1860 to 1913 from 3 to 71. In 1902 there were altogether two London foreign exchange brokers. [26]  In the earliest years of the twentieth century trade was most active in Paris, New York and Berlin, while Britain remained largely uninvolved in trade until 1914. Between 1919 and 1922 the employment of a foreign exchange brokers within London increased to 17, in 1924 there were 40 firms operating for the purposes of exchange. [27]  During the 1920s the occurrence of trade in London resembled more the modern manifestation, by 1928 forex trade was integral to the financial functioning of the city. Continental exchange controls, plus other factors, in Europe and Latin America, hampered any attempt at wholesale prosperity from trade for those of 1930's London. During the 1920s foreign exchange the Kleinwort family were known to be the leaders of the market, Japhets, S,Montagu & Co. and Seligmans as significant participants still warrant
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