The goals of this chapter are: To describe the FX market, to identify participants and currencies, to describe the mechanics and technology of FX trading, to introduce some exchange rate concepts, to illustrate FX position keeping, to describe the AUD FX market, to introduce some FX jargon. | Chapter 2 The Foreign Exchange Market Objectives To describe the FX market. To identify participants and currencies. To describe the mechanics and technology of FX trading. To introduce some exchange rate concepts. To illustrate FX position keeping. To describe the AUD FX market. To introduce some FX jargon. Definition The FX market is the market where national currencies are bought and sold against one another. Foreign exchange consists mainly of bank deposits. Characteristics It is the largest and most perfect market. It is needed because every international transaction requires a foreign exchange transaction. It is an over-the-counter (OTC) market. Market Participants Foreign exchange traders buy and sell currencies directly or indirectly. Arbitragers exploit exchange rate anomalies; hedgers cover open positions; and speculators take open positions. Categories of Participants Customers Commercial banks Other financial institutions Brokers Central banks Interbank Operations The FX market is dominated by interbank operations. Participants in the interbank market are market makers, other major dealers and second-tier banks. Size and Composition The size of the global FX market is measured by the sum of daily turnover in FX centres. A survey is coordinated by the BIS every three years for this purpose. Daily Turnover in the FX Market (USD Billion) The Geographical Distribution of FX Market Turnover (Per Cent) FX Market Turnover by Counterparty (Per Cent) FX Market Turnover by Counterparty (Per Cent) Currency Composition of FX Market Turnover (Per Cent) Currency Composition of FX Market Turnover (Per Cent) Traded Currencies The US dollar is the most heavily traded currency. The euro and the yen are heavily traded because of the importance of Europe and Japan in the world economy. Traded Currencies (cont.) The pound is heavily traded for historical reasons. Currencies that are heavily traded in certain financial centres and lack liquidity in others: CHF, CAD. Traded . | Chapter 2 The Foreign Exchange Market Objectives To describe the FX market. To identify participants and currencies. To describe the mechanics and technology of FX trading. To introduce some exchange rate concepts. To illustrate FX position keeping. To describe the AUD FX market. To introduce some FX jargon. Definition The FX market is the market where national currencies are bought and sold against one another. Foreign exchange consists mainly of bank deposits. Characteristics It is the largest and most perfect market. It is needed because every international transaction requires a foreign exchange transaction. It is an over-the-counter (OTC) market. Market Participants Foreign exchange traders buy and sell currencies directly or indirectly. Arbitragers exploit exchange rate anomalies; hedgers cover open positions; and speculators take open positions. Categories of Participants Customers Commercial banks Other financial institutions Brokers Central banks Interbank Operations The FX .
