Foreign Exchange Markets
Exchange markets Contrary to stock markets and markets
for terminal exchange dealings, exchange markets do not work in a
definite building and they do not have definite business hours. Thanks
to the development of telecommunications most of the leading financial
institutions of the world use services of exchange markets directly and
via mediators 24 hours a day. The biggest international exchange
markets are the London, New York and Tokyo exchange markets. In some
countries with transitional economies there are exchange markets for
currency exchange by juristic persons and for forming a market exchange
rate. The state usually regulates the exchange rate in an active
manner, using the compactness of the exchange market. Central banks control currency reserves, realize
interventions that influence the exchange rate, and regulate the
interest investment rate in the national currency. The central bank of
the United States, the US Federal Reserve Bank, or "FED", has the
greatest influence in the international exchange markets. It is
followed by the central banks of Germany, (the Deutsche Bundesbank or
BUBA) and of Great Britain (the Bank of England, nicknamed the "Old
Lady"). Firms that conduct foreign trade transactions. Companies
participating in international trade have a stable demand for foreign
currency (importers) and supply (exporters). As a rule, these
organizations do not have direct access to exchange markets, and they
conduct their conversion and deposit transactions via commercial banks. Investment funds. These companies, represented by various
international investment, pension,and mutual funds, insurance
companies, and trusts, realize the policy of diversified management of
portfolio of assets by placing there money in securities of the
governments and corporations of different countries. The world-know
fund, Quantum, is owned by George Soros, and it executes successful
exchange speculations. Big international corporations as Xerox, Nestle,
General Motors a.o. that make foreign industrial investments (creating
branches, joint ventures etc.), also are firms of this kind. Broker companies bring together a buyer and a seller of
foreign currency and conduct a conversion dealing between them. Broker
companies take a broker's fee. As a rule, in the FOREX market there is
no fee as a per cent from the sum of a transaction, or as a sum agreed
in advance. Usually the dealers of broker companies quote currency with
a spread, that includes their fee. A broker company, having the
information about the asked rates, is a place where the real exchange
rate is formed according to closed deals. Commersial banks get their
information about the current exchange rate from broker companies. The
biggest international broker companies are Lasser Marshall, Harlow
Butler, Tullett and Tokio, Coutts, and Tradition. Private persons. Natural persons realize a wide range of
non-commercial transactions in the sphere of foreign tourism, transfers
of salaries, pensions, royalties, buying and selling foreign currency.
This is also the biggest group that realizes speculative exchange
transactions. The working day of exchange brokers of
Western commercial banks starts, as a rule, at 7:30 am by local time.
At 8:00 am the dealers are already closing deals. The morning hours are
usually devoted to short analyses of events on the international
exchange markets at the moment. The dealers use economic and technical
analyses of the situation in the market, read analytical articles in
newspapers, then exchange points of view and the latest rumors with
each other and with dealers from other commercial banks. On the basis
of various data, a picture of possible behavior of the exchange rate on
the coming day is put together, with variants of all sorts of possible
events. By 8:00 am the market, consisting of
individual dealers, will have worked out the tactics of its behavior,
and it enters the operations of the international exchange market,
giving a new and powerful impulse to the movement of the exchange rate.
Various territorial markets can be given the following characteristics
of an average typical activity during a 24 hour day. Far East. Here the most active deals in the market are
conversion transactions with the dollar to the Japanese yen, the dollar
to Euro, Euro to yen, and the dollar to the Australian dollar. Very
often fluctuations of exchange rates at that time are insignificant,
but there are days when currencies, especially the dollar against the
yen, make breath-taking flights. Especially so when the central bank of
Japan makes an intervention. In Moscow its night and morning at that
time, so till noon one can work with Tokyo, till mid-day with Singapore. Western Europe. At 10:00 am Moscow time the market in the
European financial centers of Zurich, Frankfurt-on-Main, Paris,
Luxembourg are open. However, the really powerful movement of the
exchange rate against the main currencies starts after 11:00 am Moscow
time, when the London market is opened. This continues, as a rule, for
2 to 3 hours, after that the dealers of the European banks go to have
lunch, and the activity of the market falls down a bit. North America. The situation livens up with the opening of
the New York market at 4:00 pm Moscow time, when dealers of American
banks start working, and when European dealers come back from their
lunch. Powers of European and American banks are about equal, that is
why fluctuations of the rate do not go out of the limits of usual
European fluctuations. Nevertheless, exchange dealers look forward to
the opening of the New York market in order to receive fresh data about
a possible movement of the rate (the more so if the European market has
been sluggish). But when the European market is closed about 7p m or
8pm Moscow time, aggressive American banks, left alone on the "thin"
market, are able to cause a sharp change of the exchange rate of the
dollar against other currencies. The international exchange system
********ing in the world at the moment develops among people dealing
with exchange and financial transactions: the so-called speculative
psychology. In the world where exchange rates fluctuate for some per
cent every week, where currencies, that are considered to be stable can
lose 20 to 30 per cent of their cost during a few months, it's
absolutely clear that the manager of a fund, trying to compensate for
inevitable losses, has to use speculative operations. For example, a
reasonable owner of dollars has to get rid of them very quickly and
exchange them for Euro every time the expected fall of the dollar
against Euro surpasses the difference between the profit from American
notes and the profit from the respective German notes. For instance, if
in the coming months the dollar is expected to fall against the Euro by
6%, and the profit from American notes is 6 per cent bigger than the
profit from German notes, a speculator will probably decide to keep
dollars. If the gap in the interest rates is less than the expected
fall of the rate, the "running away from the dollar" begins. Who are these speculators? An analysis
shows that the main speculators acting in the market are institutional
investors. Among them one can single out, first of all, official state
institutions, and, secondly, private financial and other institutions.
Thus according to the report of the "Group of Ten", state investors in
Europe and Japan keep about 20 per cent of their assets in the form of
foreign securities (in the USA only 7.5 per cent). However, the main
feature of the 1980s was the growing international activity of private
financial institutions: pension funds, insurance companies, and mutual
funds. The Globalization of international financial markets is an
objective process, reflecting the growing degree of economic relations
in the world. It promotes a more effective distribution of financial
resources. AMEX - American Stock ExchangeForeign Exchange Markets
The main participants of a foreign exchange market are:
Commercial banks conduct
the main volume of exchange transactions. Other participants of the
market have their accounts at the banks, conducting necessary
conversion transactions. Banks accumulate (through transactions with
the clients) the combined needs of the market in exchange conversions
as well as in calling and distributing money, breaking with it into new
banks. Besides satisfying clients' requests, banks can operate
independently, using their own assets. In the end, a foreign exchange
market is a market of interbank dealings, and when speaking about the
exchange rates movement, one should bear in mind the existence of an
interbank foreign exchange market. In international foreign exchange
markets, international banks with the daily volume of transactions of
billions dollars have the biggest influence. These are Barclays Bank,
Citibank, Chase Manhatten Bank, Deutsche Bank, Swiss Bank Corporation,
Union Bank of Switzerland, etc.
The working hours of the markets
Exchange
markets work all the time. Their work in the calendar twenty-four-hour
period is started in the Far East, in New Zealand (Wellington), passing
the time zones in Sydney, Tokyo, Hong Kong, Singapore, Moscow,
Frankfurt-on-Main, London, then finishing the day in New York and Los
Angeles. The count of time zones begins from the zero meridian in
Greenwich near London, and the time itself is called Greenwich Mean Time (GMT). Depending on the season (summer or winter), the time in different financial centers of the globe will differ from the GMT.
What is a FX speculator?
In
modern conditions practically all financial transactions in the market
are speculative by their nature, and there's nothing abnormal or
criminal in it. One of the most vivid indices of markets' globalization
is their daily volume of exchange transactions. Only in 10 major
financial centers it increased from 206 billion dollars in 1986 to 967
billion dollars in 1992. According to the IMF, on the whole the volume
is over 1 trillion dollars a day, and on some days it reaches 3
trillions. It is enough to say that the volume of gold and foreign
exchange reserves of all developed countries was only 555.2 billion
dollars in 1992, which is two times less than a daily volume of market
transactions. According to some calculations, the volume of exchange
transactions is 40 times bigger that the daily volume of foreign trade
transactions. Therefore, most of the deals are caused not by a
commercial necessity, but by financial reasons. And a financial
transaction is always caused by the fact that money is looking for some
profitable usage.
Major world exchange markets:
BOVESPA - Sao Paulo Stock Exchange
CBOT - Chicago Board of Trade
CHX - Chicago Stock Exchange
CME - Chicago Mercantile Exchange
Commodities on the Web - List of the commodities
LIFFE - London International Financial Futures and Options Exchange
London Stock Exchange -London Stock Exchange
Nasdaq
NYMEX - New York Mercantile Exchange
NYSE - New York Stock Exchange
SBF - la Bourse de Paris
SES - Singapore Exchange
SET - Stock Exchange of Thailand
TSE - Tokyo Stock Exchange
TSE - Toronto Stock Exchange
LSEX - London Stock Exchange
CBOE - Chicago Board Options Exchange CBOE
PHLX - Philadelphia Stock Exchange
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With
an understanding of what we are looking at, now we can turn out focus
to the actual price quotes. The graphic shows a sample table of quotes
for an array of currency pairs - majors and crosses.