Chapter 1
National currencies
Spot rates, cross rates, and the
arbitrage opportunities
Intra-day activity
Central bank intervention
Trading volume and major
players
Poorna Pal, MS MBA Ph.D.
The currencies and currency
symbols
Currencies with their own special symbols: $
€
The ISO codes of national currencies
£
¥
USD US dollar
ISO (International Standards
₹
Organization) maintains the 2EUR Euro
GBP British pound
JPY Japanese yen
AFN Afghanistan Afghani
ALL Albanian Lek
US Dollar
Euro
British Pound
Japanese Yen
Indian Rupee
digits/3-digits codes for every
country and its currency.
Euro (EUR) is the common
currency of the following
European countries:
Austria, Belgium, Cyprus,
Finland, France, Germany,
Greece, Ireland, Italy, Luxembourg, Malta, Netherlands,
Portugal, Spain and Slovenia.
World
currencies
Paper
Currencies of
the World
http://www.xe.com/symbols.php#list
Currencies of the world,
by order of popularity
http://www.xe.com/currency/
Spot rates and spreads
Bid/offer spread
(also known as bid/ask or buy/sell spread) for securities (such as stocks, futures
contracts, options, or currency pairs) is the difference between the prices quoted
(either by a single market maker or in a limit order book) for an immediate sale (ask)
and an immediate purchase (bid). The size of the bid-offer spread in a security is a
measure of the liquidity of the market and of the size of the transaction cost.
Example: Currency spread
If the current bid price for the EUR/USD currency pair is 1.5760 and the current ask
price is 1.5763, this means that currently you can sell the EUR/USD at 1.5760 and
buy at 1.5763. The difference between those prices is the spread. If the USD/JPY
currency pair is currently trading at 101.89/92, that is another way of saying that the
bid for the USD/JPY is 101.89 and the ask is 101.92. This means that currently,
holders of USD can sell 1 USD for 101.89 JPY and investors who wish to buy dollars
can do so at a cost of 101.92 JPY per 1 USD.
Recent OANDA Spreads
Select from the currency-pair list to see 7-day historical spread charts for any of the
currency pairs available for trading at OANDA. Our prices are a true reflection of forex
market pricing. We always publish tradable spreads—even when spreads widen due to
market events or on weekends, when liquidity is scarce. Click the numbers in the charts to
see market events that may have affected our spreads. OANDA also publishes real-time
currency spreads and a comparison of spreads with other brokers.
http://www.marketwatch.com/investing/currencies/tools
Cross rates
Cross Rate Calculation
by csbhatnagar 1,395 views
More on cross rates here
http://www.marketwatch.com/investing/currencies/tools
The Forex Market
Never Sleeps
Comparing Major
World Indexes
(March 9, 2009 to May 25, 2010)
http://www.ritholtz.com/blog/2010/05/comparing-world-indices/
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Central Bank intervention can steady
the exchange rate. Suppose US demand for Japanese goods
Start with …
• ¥100 = 1 $ exchange rate, and
• demand and supply for $ as shown.
increases. More $ now become available,
so driving the exchange rate to ¥90 = 1 $.
¥/$ Exchange Rate
D1
S1
100
90
$ Quantity
As this appreciation
of ¥ against $ hurts
the Japanese sales,
Bank of Japan can
make ¥ cheaper by
lowering Japanese
interest rates or $
costlier by buying $,
so restoring ¥100 =
1$ exchange rate.
Global foreign exchange market turnover by instrument1
http://www.bis.org/publ/rpfx10.pdf
4
Options etc.
3
Foreign
exchange
swaps
2
Forwards
1
Spot
transactions
2010
2007
2004
2001
1998
1995
1992
0
1989
trillion US$ at April 2010 exchange rate
Average daily turnover,
Global foreign exchange market
turnover by instrument
Source: Bank of International Settlements
(http://www.bis.org/)
Options etc.
3
Foreign
exchange
swaps
2
Forwards
1
Spot
transactions
2010
2007
2004
2001
1998
1995
1992
0
1989
trillion US$ at April 2010 exchange rate
Average daily turnover,
4
Source: Bank of International Settlements (http://www.bis.org/)
Forex Trading
Volume Minimizes Swings
Oxford Analytica, 09.29.10, 06:00 AM EDT
In most developed
economies currency trading
is such a huge market that no
According to the Bank for Interone player can cause a
national Settlements' April 2010
substantial
surveys:
move.
• the euro/dollar market is trading over $1 trillion per day, and the
•
•
overall market for dollar as a counterpart is worth $3.1 trillion/day.
yen intervention faces a market worth $750 billion per day; and
the Swiss National Bank is active in the Swiss franc today, while
acknowledging that it can have little sustained impact in a market
worth $240 billion per day.
As the yen and Swiss franc show that even the "smaller"
markets are too big to be influenced unilaterally. As neither
Japanese nor Swiss efforts today would enjoy the support of a
multilateral agreement to intervene, they are likely to have little
more than brief effect on these currencies' values.
Black Market versus Parallel Market
The distinction between the parallel and the black markets
is drawn along several related lines: how much is being
sold, who is buying and who is selling, and where the
transaction is taking place.
The parallel market usually deals in large sums — many millions of
dollars; it is often between businessmen and companies and, in the
past, had bankers as its middle-men; and it takes place in offices and
sometimes homes.
Black market transactions happen on the streets, in the flea markets,
and in back-rooms; sometimes for small sums of money like 20 US
Dollars; and the deals often take place between individuals.
The Forex Market: A
layman's guide to how
it works, and why it
does what it does