5014 - Finance of International Trade - The nature of the FOREX market p47-66 Flashcards
Which Commodity and Products are the most traded in the world?
Brent Crude Oil Steel WTI Crude Oil Soya beans Iron Corn Gold Copper Aluminium Silver
FOREX Market Size
On first look the FOREX market size makes no sense. Global merchandise trade is $19 trillion, Services is $5 trillion so $24 trillion total, but the volume is $1,800 Trillion + a year
Reasons for Trading on the FOREX
To Pay for goods and services (surprisingly accounting for a tiny volume worth only 5 days of trading a year)
Speculation that a currency is going in the way you predict to make profit
Arbitrage - Buying and selling on 2 markets in large quantities at the same time to exploit price differences
Hedging to cover or remove risk for example a business in Venezuela would face volatile fluctuations form keeping it in their currency, so most use dollars as its much less volatile.
What kind of trades happen on the FOREX?
Spot transactions
Forward Contracts - Like a futures contract but done privately and unstandardized
Options
Foreign Exchange Swaps
Currency Swaps
Spot transactions
Buying and selling at todays exchange rate
Forward transactions
Buying and selling in the future at an exchange rate agreed today
Options
Same as forward contracts but can opt out so no obligation to honour agreed exchange rate
Futures
Forward contract but more standardised
Swaps
An exchange of currency with someone else, not bought or sold but swapped
What does the FOREX support?
International trade through allowing currency conversion
Risk management
Arbitrage
Speculation
Where is the bulk of FOREX trading conducted?
The UK followed by the US then Switzerland
Why is the dollar a major traded currency?
The volume of trade conducted by the US creates a demand for buying and selling dollars
Oil is priced in dollars
The US is (arguably) economically and politically stable in comparison to other countries
What are some of the most traded currencies?
US Dollar (number one) Euro Yen Pound AUS Dollar
Is the foreign exchange market liquid?
The FOREX is the most liquid market there is
Who trades Forex
Large banks Central Banks Institutional investors Currency speculators Governments Financial Institutions Retail Investors
The FOREX is split up into different access levels based on what?
The amount of money being traded by an entity.
The top level includes the largest banks and securities dealers
Following this are smaller banks, multi-national corporations, hedge funds and some retail market makers
FX dealers
Tend to specialise in one currency or a small group of closely related currencies. They make deals over the phone or electronically without the use on an exchange
The role of Brokers
Broking firms do not quote FX rates or take positions in currencies, they act on behalf of the traders they do not reveal their prices and positions until the deal is agreed upon. These brokers operate on a commission basis related on size and complexity of the issue
FOREX Market Characteristics
It has large trading volume and is the largest asset class so most liquid
Geographical dispersion
24 hours a day except weekend
Low margins of relative profit compared with other markets of fixed income
The use of leverage to enhance profit and loss margins with respect to account size
