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PPT : The Spot Market for Forex
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Foreign Exchange Market
* currencies (FOREX) are traded in a highly liquid, global market
* as the FOREX market is global, it is a 24 hour market, with a new major trading centre somewhere always open
* the major participants in the FOREX market are large commercial banks who buy and sell currencies:
+ to meet customers needs for currencies
+ for proprietary trading reasons
The FOREX market can be broken down into two basic parts:
+ Spot Market
+ Forward Market
We will look at the spot market right now.
* The spot market is the market for immediate exchange of currencies.
* “Immediate” is actually a misnomer, actual delivery of currencies which have been traded occurs through an electronic transfer between bank accounts two working days after the deal is made.
* It is in the spot market that the current exchange rate (the spot rate)
Currency Dealers
* the large, commercial banks employ currency dealers
* it is these people who set exchange rates in response to supply and demand that they see coming in through orders they receive
* a dealer quotes prices at which he or she is willing to transact
* the prices are posted electronically, so that the quote is disseminated around the world to other dealers
* a quote actually involves four things: a bid price, an ask price, a bid depth and an ask depth
Price Quotes
* the bid and ask (or offer) prices are the price at which the dealer is willing to buy and sell the currency, respectively
* the depths are the amounts of currency up to which the dealer guarantees the price quotes
Example: if the depth is $10,000,000 then the price quote is valid for transactions up to that amount. More than that and the price would have to be negotiated.
* For the bid and ask prices, it will always be the case that:
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