Spot Exchange Market and Exchange Rate Quotations

The spot exchange market is a market that deals in foreign exchange for immediate delivery. Immediate delivery in foreign currencies usually means within two business days.
A spot exchange rate is the current market price, the rate at which a foreign exchange dealer converts one currency into another currency on a particular day.
Small- to medium-size banks are not market makers in the interbank market. They buy from and sell to larger banks to offset retail transactions with their own customers.



American quote is the dollar per currency quote, i.e. the price of other currencies in terms of the dollar. Example: US$ 1.57 = ￡1 US$ 1.35 = €1

Hale Waihona Puke European quote is the currencies per dollar quote, i.e. the price of the dollar in terms of the other currencies. Example: A$ 1.02 = US$ 1 € 0.74 = US$ 1


Foreign exchange brokers do not put their own money at risk. They serve three purposes in the market. First, they are the sources of information. Second, they bring buyers and sellers together and contributes to market efficiency. Third, they make it possible for traders to remain anonymous. Businesses such as MNCs are the major nonbank participants in the market. Central banks buy and sell currencies in a bid to influence the exchange rate.

Bid and ask quotes are the prices at which a bank likes to buy and sell standard amounts of foreign currency. Example: $1.0206/SFr Bid $1.0217/SFr Ask When bid is lower than ask, the bank is buying or selling the currency in the denominator of the quote. When bid is higher than ask, the bank is buying or selling the currency in the numerator of the quote.



Example: SFr0.9798/$ Bid SFr0.9787/$ Ask The bank spends one dollar to buy SFr0.9798; It sells SFr0.9787 for one dollar.




The foreign exchange market is an informal, over-the-counter and around-the-clock market. It has no centralized meeting-place and no formal requirements for participation. The market never sleeps. Tokyo, London, and New York are all shut for only 3 hours out of every 24. During these three hours, trading continues in a number of minor centers, particularly San Francisco and Sydney.
Spot
Forwards
Swaps
Top 10 geographic trading center in the foreign exchange market, 1992-2007 (daily averages in April, billions of $)

Foreign exchange market structure


Global foreign exchange market turnover, 1998 2010 (daily averages in April, billions of U.S. dollar)
$2,000 $1,800 $1,600 $1,400 $1,200 $1,000 $800 $600 $400 $200 $0 1998 2001 2004 2007 2010

Retail customers are made up of individuals, international investors, small businesses, speculators or the like who need foreign exchange. Commercial banks (market dealers) carry out buy/sell orders from their retail clients and buy/sell currencies on their own account.


Measuring foreign exchange market activity: Average electronic conversions per hour

As of 2009, more than $3 trillion are traded in this market on a daily basis. This was a massive increase of nearly 70% over the 2004 survey’s estimate of $1.9 trillion. The U.S. dollar was involved in more than 90% of all foreign exchange transactions, followed by the euro (38%), yen (23%), and British pound sterling (13%). London is the largest world foreign exchange market, followed by New York and Tokyo. London accounts for 34.1% of daily world exchange. New York is about 16%.

Foreign exchange rate quotations on the U.S. Dollar/British Pound in the Financial Press

An exchange of currencies involves two currencies. Either of which may be placed in the denominator. The quotation of the exchange rates follows conventions. Direct quote is the amount of domestic currency per unit of foreign currency. In Japan ￥115 = €1 In Canada C$1.50 = ₤1 Indirect quote is the amount of foreign currency per unit of domestic currency. In England $1.60 = ₤1



Foreign exchange rate is the price of one currency in terms of another. Foreign exchange market is the place where currencies are bought and sold. The foreign exchange market is by far the largest financial market in the world. Foreign exchange market has two functions: the first is to convert one currency into another (the spot exchange market); the second is to provide insurance against foreign exchange risk (the forward exchange market).