9.2: The Nature of the Foreign Exchange Market Flashcards
That is the nature of the foreign exchange market?
The foreign exchange market is a global network of banks, brokers, and foreign exchange dealers connected by electronic communication systems. It is not located in any one place.
What has been the growth trend in the foreign exchange market?
The foreign exchange market has grown rapidly, with the average total value of global foreign exchange trading increasing from about $200 billion per day in 1986 to $5.1 trillion a day by April 2016.
Which city is the most important trading center in the foreign exchange market and why?
London is the most important trading center, due to its historical role as the world’s largest center for international banking and its geographical position between East Asian and New York markets.
What are two notable features of the foreign exchange market?
The two notable features are that the market never sleeps, with major centers like Tokyo, London, and New York shut for only three hours out of every 24,
and the high degree of integration among various trading centers, allowing for consistent exchange rates across different locations.
How does arbitrage work in the foreign exchange market?
Arbitrage in the foreign exchange market involves taking advantage of price differentials in different markets.
For example, a dealer could buy a currency at a lower rate in one market and sell it at a higher rate in another, but such opportunities are rare and disappear quickly due to market adjustments.
Why is the U.S. dollar considered a vehicle currency in the foreign exchange market?
The U.S. dollar is considered a vehicle currency because it is involved in 87 percent of all foreign exchange transactions, making it central to many deals even when the transaction involves two non-dollar currencies.
