Quiz 17: The Foreign Exchange Market
Spot foreign exchange markets are the ones that allow traders or investors to exchange the foreign currencies at the current exchange price within the time span of two days. In these types of markets once the exchange rate is agreed for the standard large transactions of foreign currencies then it takes maximum of one 2 days for the whole transactions of foreign currencies. The major types of transactions or activities that result in supply of foreign currencies in the Spot Foreign Exchange Markets are usually in the forms of cash-in of travelers and transferring of money via banks and the transaction of currency notes. European Forex Market is the major producer of Spot Forex transactions. London forex comprises of 50% Spot Foreign Exchange transactions.
An US firm must make a payment of 1M Yen to a Japanese firm that has sold the US firm sets of Japanese basket ball-player trading cards. If the US firm is writing a check in US Dollars then the Japanese firm has no obligation in receiving the US Dollar check and must have US dollar bank deposits. Or the Japanese firm must be paid in Japanese Yen. In such a case US firm must sell US Dollars to get Japanese Yen to make payments for Japanese baseball player trading cards. Thus the US firm must request its Bank for the quotation of the exchange rates of Japanese Yen and then Bank of US firm pays from its Japanese Yen fixed deposits. In the Spot Forex Market anyone can acquire foreign moneys, whether they are any organization, business entity or an individual. In these markets foreign currencies are allowed to make payments for any imported or exported goods and services. Even in the Spot Forex Market people or businesses can sell foreign currencies which they have received in payments.
Interbank Foreign Exchange Markets are those markets which are used by financial institutions for the trading of currency among themselves. Interbank (or interdealer) trading is also done by traders at banks for their large number of customers. More than 40% of Forex trading is done among interbank trading. Now a day's most of the interbank trading is done through technology or electronic platforms, which enables the traders to get in touch with exchange rates of the worldwide trading at all the times. It ultimately helps firms keeping their position strengthened quickly and that too at low price or value. If a trader at a US bank believes that the Euro will strengthen in exchange rate value during the next hour then she uses her insights of trading and currency valuation. She deals with interbank traders of other firms as well then she gets continuous stream of information by interacting with different traders at different banks and by continuous observations of exchange rate quotations. Although it is a very hectic job as humongous amounts of demand deposit currency is exchanged and with the proper information dealers can earn profits for their customers or the entities for which they are working for.