The Market for Foreign Exchange

Chapter Five
© 2021 McGraw Hill. All rights reserved. Authorized only for instructor use in the classroom. No
reproduction or further distribution permitted without the prior written consent of McGraw Hill.
 Overview
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.#"*-$'>&8.#2&7$(")/*)&"3&3"'$/0#&,+''$#,%>&*-$&$4*$#)/"#&"3&
,'$7/*&7$#"6/#.*$7&/#&.&3"'$/0#&,+''$#,%>&3"'$/0#&*'.7$&
3/#.#,/#0>&*'.7/#0&/#&3"'$/0#&,+''$#,%&"(*/"#)&.#7&3+*+'$)&
,"#*'.,*)>&.#7&,+''$#,%&)1.()

© McGraw Hill 5-2

 Function and Structure of FX Market
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47'%(,#3()'-8,-3(!*(+,-./%0(,-/(9:;(+,-./%0<(+/,#&#=(%-,3&#=(
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0/11/-0($'#=-/=,%/
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AB C"0%-,1,0&,D(4>3#/><(:'.>'<(E'#=(F'#=<(4&#=,7'-/<(,#3(
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HB I"-'7/D(J"-&$2<(!-,#.)"-%<(K,-&0<(G-"00/10<(C+0%/-3,+<(,#3(
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MB N'-%2(C+/-&$,D(N/8(O'-.<(?'#%-/,1<(:'-'#%'<(;2&$,='<(4,#(
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© McGraw Hill 5-3
 FX Market Participants
:<&6.'2$*&/)&.&*1"?*/$'&6.'2$*
@A B#*$'8.#2&;1-"5$).5$=&6.'2$*
• C8"+*&@DD&*"&EDD&8.#2)&1"'571/7$&)*.#7&'$.7%&*"&F6.2$&
.&6.'2$*G&/#&3"'$/0#&$4,-.#0$
• H"#8.#2&7$.5$')&.,,"+#*&3"'&.8"+*&IDJ&"3&*-$&6.'2$*
• K-$'$&.'$&:<&8'"2$')&1-"&6.*,-&8+%&.#7&)$55&"'7$')&8+*&
7"&#"*&,.''%&/#9$#*"'%&.#7&:<&)($,/.5/)*)
EA L5/$#*&;'$*./5=&6.'2$*&
!.'2$*&(.'*/,/(.#*)&/#,5+7$&/#*$'#.*/"#.5&8.#2)>&*-$/'&
,+)*"6$')>&#"#8.#2&7$.5$')>&:<&8'"2$')>&.#7&,$#*'.5&
8.#2)
© McGraw Hill 5-4
 Shares of Reported Global Foreign Exchange
Turnover by Country

!"#$%&'()*"+$)&,-&*$#&".&/"01/&,*#$)2$1/$)&2"(3/$40"(*#,*56&7())$*08&-91:-&1*2&;<&
":#,"*-&1)$&*"#&,*0/(2$26&
="()0$%&'13(/1#$2&.)">&21#1&,*&'),$**,1/&7$*#)1/&?1*@&=()+$8A&B)$/,>,*1)8&
C$-(/#-A&?1*@&.")&D*#$)*1#,"*1/&=$##/$>$*#-A&=$:#$>3$)&EFGH6
!""#$$%&'#%&#(&%)*&#+,)&-.#%/0+%$*-1#%-2)3#$4 © McGraw Hill 5-5
 Average Electronic Foreign Exchange
Conversations per Hour (Monday to Friday, 2001)

="()0$%&;$2$)1/&C$-$)+$&?1*@&".&!$9&I")@A&J'K$&;")$,5*&LM0K1*5$&N1)@$#&,*&#K$&
O*,#$2&=#1#$-AP&EFFGA&9996*$98")@.$26")56&

!""#$$%&'#%&#(&%)*&#+,)&-.#%/0+%$*-1#%-2)3#$4 © McGraw Hill 5-6

 Correspondent Banking Relationships
B#*$'8.#2&6.'2$*

• !.7$&+(&"3&.&#$*1"'2&"3&,"''$)("#7$#*&8.#2/#0&
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7$6.#7&7$(")/*&.,,"+#*)&;*-.*&/)>&,"''$)("#7$#*&
8.#2/#0&.,,"+#*)=&1/*-&"#$&.#"*-$'

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$33/,/$#*&3+#,*/"#/#0&"3&*-$&:<&6.'2$*

© McGraw Hill 5-7

 Correspondent Banking Communications
B#*$'#.*/"#.5&,"66$',/.5&8.#2)&,"66+#/,.*$&1/*-&"#$&
.#"*-$'&+)/#0M

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© McGraw Hill 5-8

 Spot Market
N("*&6.'2$*&/#9"59$)&.56")*&/66$7/.*$&(+',-.)$&"'&).5$&"3&
3"'$/0#&$4,-.#0$

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#"#?H"'*-&C6$'/,.#&,+''$#,%

© McGraw Hill 5-9

 Spot Rate Quotations 1

N("*&'.*$&,+''$#,%&V+"*.*/"#)&,.#&8$&)*.*$7&/#&7/'$,*&"'&
/#7/'$,*&*$'6)

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3"'$/0#&,+''$#,%&/#&*$'6)&"3&*-$&7"6$)*/,&,+''$#,%

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/#&*$'6)&"3&.&3"'$/0#&,+''$#,%

© McGraw Hill 5-10

 Average Daily Foreign Exchange Turnover by
Instrument and Counterparty
0&%",1(%*2"* 0&%",1(%*2"*
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© McGraw Hill 5-11
 Exchange Rates 1

Currencies April 3, 2019

3S4SRF,88.%*I,%(2E"R(O;D."E(*%.$(#*2"*8.$(*P(C*T,%U*$%.F2"E*

—Wed — —Wed —
Country/Currency In US$ Per US$ Country/Currency In US$ Per US$
Americas Asia Pacific
Argentina peso .0233 42.854 India rupee .01461 68.425
Brazil real .2583 3.8715 Indonesia rupiah .0000703 14223
Canada dollar .7493 1.3345 Japan yen .00897 111.49
Chile peso .001500 666.73 1-mos forward .00899 111.22
Colombia peso .000320 3123.6 3-mos forward .00903 110.70
Ecuador US dollar 1 1 6-mos forward .00910 109.90
Mexico peso .0520 19.220 Malaysia ringgit .2452 4.0790
Peru new sol .3034 3.296 New Zealand dollar .6778 1.4753
Uruguay peso .02965 33.4300 Pakistan rupee .00709 140.47
Asia Pacific Philippines peso .0192 52.124
Australian dollar .7113 1.4060 Singapore dollar .7387 1.3537
1-mos forward .7117 1.4051 South Korea won .0008814 1134.5
3-mos forward .7125 1.4035 Taiwan dollar .03246 30.812
6-mos forward .7139 1.4008 Thailand baht .03150 31.748
China yuan .1490 6.7114 Vietnam dong .00004 23146.3
Hong Kong dollar .1274 7.8494
© McGraw Hill 5-12
 Exchange Rates 2

—Wed — —Wed —
Country/Currency In US$ Per US$ Country/Currency In US$ Per US$
Europe Europe
Czech Rep. koruna .04372 22.874 UK pound 1.3158 .7600
Denmark krone .1505 6.6457 1-mos forward 1.3180 .7588
Euro area euro 1.1233 .8903 3-mos forward 1.3218 .7565
1-mos forward 1.1262 .8880 6-mos forward 1.3277 .7532
3-mos forward 1.1319 .8835 Middle East/Africa
6-mos forward 1.1407 .8767 Bahrain dinar 2.6526 .3770
Hungary forint .00351 284.71 Egypt pound .0577 17.325
Norway krone .1167 8.5728 Israel shekel .2777 3.6016
Poland zloty .2619 3.8183 Jordan dinar 1.4104 .7090
Russia ruble .01533 65.241 Kuwait dinar 3.2854 .3044
Sweden krona .1079 9.2695 Lebanon pound .00066 1507.50
Switzerland franc 1.0018 .9982 Saudi Arabia riyal .2666 3.7504
1-mos forward 1.0047 .9953 South Africa rand .0707 14.146
3-mos forward 1.0104 .9897 UAE dirham .2723 3.6730
6-mos forward 1.0193 .9811
Turkey lira .1778 5.6248 Source: Compiled using data from Bloomberg and
OANDA online currency converter at www.oanda.com.

© McGraw Hill 5-13

 Spot Rate Quotations 2

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UANA&7"55.'&/)&('/,$7&/#&*$'6)&"3&*-$&3"'$/0#&,+''$#,%&;.#&
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© McGraw Hill 5-14

 The Bid-Ask Spread
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X/7?.)2&)('$.7&.55"1)&7$.5$')&*"&$.'#&.&('"3/*

© McGraw Hill 5-15

 Spot FX Trading
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6/55/"#
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*"&8$&2#"1#&8%&.55&*'.7$')
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© McGraw Hill 5-16

 Cross-Rate Trading Desk
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• P.#75$7&.*&*-$&,'"))?'.*$&7$)2&"3&*-$&8.#2

© McGraw Hill 5-17

Calculating Cross-Exchange Rate Bid-Ask Spread
L<QNBRL&S6E%&71/0(/1#,*5&#K$&7)"--4LM0K1*5$&C1#$&?,24Q-@&=:)$12

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#K$&0)"--4)1#$&3,241-@&-:)$12-&1)$&>(0K&/1)5$)&#K1*&#K$&Q>$),01*&")&L()":$1*&3,241-@&
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2,..$)$*0$&-,*0$&1&?),#,-K&:"(*2&,-&:),0$2&1#&>")$&#K1*&G6Z&2"//1)-6&'K$&,>:/,01#,"*&,-&#K1#&
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#9"&0())$*0,$-6&LMK,3,#&S6H&:)"+,2$-&1&>")$&2$#1,/$2&:)$-$*#1#,"*&".&0)"--4)1#$&.")$,5*&
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© McGraw Hill 5-18
 Cross-Rate Foreign Exchange Transactions
American Terms European Terms
Bank Quotations Bid Ask Bid Ask
British pounds 1.3153 1.3158 .7600 .7603
Euros 1.1228 1.1233 .8903 .8906
.S**V."U*+&#$,'(%*C."$#*$,*#(88*W<=HHHSHHH*I,%*(&%,#S*0D(*V."U*C288*I2%#$*7&/*V%2$2#D*-,&"F#
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+&#$,'(%Q
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-,&"F#*2#*Z<S<@<H<-Z<S<@<?G=*$D(*#.'(*.#*$D(*72FR.#U*#-%(.F*;,'-&$(F*2"*NO.'-8(*GSBS
© McGraw Hill 5-19
 Triangular Arbitrage
K'/.#0+5.'&.'8/*'.0$&/)&*-$&('",$))&"3&*'.7/#0&"+*&"3&*-$&UANA&
7"55.'&/#*"&.&)$,"#7&,+''$#,%>&*-$#&*'.7/#0&/*&3"'&.&*-/'7&
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• Q+'(")$&/)&*"&$.'#&.#&.'8/*'.0$ ('"3/*&9/.&*'.7/#0&3'"6&*-$&
)$,"#7&*"&*-$&*-/'7&,+''$#,%&1-$#&*-$&7/'$,*&,'"))?
$4,-.#0$&'.*$&8$*1$$#&*-$&*1"&/)&#"*&/#&.5/0#6$#*&1/*-&
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1-/,-&.&('"3/*&/)&0+.'.#*$$7

© McGraw Hill 5-20

 Spot Foreign Exchange Market Microstructure
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.&6.'2$*(5.,$&"($'.*$)
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-:,/+.'-&#+%-&;)(+%"("%<&+.5&5-,#-+$-5&9"%/&5-+(-#&,)87-%"%").
• =>*&)1&.-%&5)((+#&70#,/+$-$&".,#-+$-&%/-&5-0%$,/-&8+#2&7#",-&)1&+&
5)((+#&*<&?@A&7-#,-.%
• 4"56+$2&$7#-+5$&/+;-&+&7#)().'-5&B&$/+7-&+.5&+#-&.+##)9-$%&
9/-.&C).5).&+.5&DE&+#-&)7-.F&9/"(-&%#+5".'&;)(08-&+.5&
-:,/+.'-&#+%-&;)(+%"("%<&+#-&*)%/&G6$/+7-5&9"%/&7-+2$&+%&C).5).&
)7-.&+.5&%/-&DE&)7-.

© McGraw Hill 5-21

 The Forward Market
:"'1.'7&6.'2$*&/#9"59$)&,"#*'.,*/#0&*"7.%&3"'&*-$&3+*+'$&
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© McGraw Hill 5-22

 Forward Rate Quotations 1

:"'1.'7&'.*$&V+"*.*/"#)&+)$&*-$&3"55"1/#0&#"*.*/"#)M
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© McGraw Hill 5-23

 Forward Rate Quotations 2

C6$'/,.#&*$'6&N1/))&3'.#,&3"'1.'7&V+"*.*/"#)
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 Forward Premium
L"66"#&*"&$4('$))&*-$&('$6/+6&"'&7/),"+#*&"3&.&3"'1.'7&
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C6$'/,.#&"'&R+'"($.#&*$'6&V+"*.*/"#)

© McGraw Hill 5-25

 Forward Cross-Exchange Rates

!& " # $ % !% " # ' $

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!& " # ' % !% " # ( $

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!$ " ( '# !$ " ( ' #

© McGraw Hill 5-26

 Non-Deliverable Forward Contracts
W+$&*"&0"9$'#6$#*?/#)*/*+*$7&,.(/*.5&,"#*'"5)>&,+''$#,/$)&"3&
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© McGraw Hill 5-27

 Swap Transactions
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© McGraw Hill 5-28

 Exchange-Traded Currency Funds
R4,-.#0$?*'.7$7&3+#7&;RK:=&/)&.&("'*3"5/"&"3&3/#.#,/.5&.))$*)&
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© McGraw Hill 5-29

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