All About Forex Market In Usa

[ Pobierz całość w formacie PDF ]
foreword
ALL ABOUT...
FOREWORD
Over the past forty years, the Federal Reserve Bank of New York has published
monographs about the operation of the foreign exchange market in the United States.
The first of these reports,
The New York Foreign Exchange Market
, by Alan Holmes, was
published in 1959. The second, also entitled
The New York Foreign Exchange Market
,
was written by Alan Holmes and Francis Schott and published in 1965. The third
publication,
Foreign Exchange Markets in the United States
, was written by Roger
Kubarych and published in 1978.
Each of these publications presents a lucid
and informed picture of the foreign exchange
market and how it operates, filled with
rich insights and reflecting a profound
understanding of the market and its complex
mechanisms. Roger Kubarych’s report, written
twenty years ago, provided a valuable analysis
of the foreign exchange market that is still read
and widely appreciated by persons interested in
gaining a deeper understanding of that market.
are traded. Chapters 7-8 look at foreign
exchange trading from a micro, rather than
macro, point of view—how an individual
bank or other dealing firm sees things.
Chapters 9-11 comment on some of the
broader issues facing the international
monetary system and how governments,
central banks, and market participants
operate within that system. This is followed by
an epilogue, emphasizing that there are many
unanswered questions, and that we can expect
many further changes in the period ahead,
changes that we cannot now easily predict.
But the foreign exchange market is always
changing, always adapting to a shifting world
economy and financial environment. The
metamorphosis of the 1980s and ‘90s in both
finance and technology has changed the structure
of the market and its operations in profound
ways. It is useful to reexamine the foreign
exchange market from today’s perspective.
Markets go back a long time—in English
law, the concept was recognized as early as the
11th century—and it is interesting to compare
today’s foreign exchange market with historical
concepts. More than one hundred years ago,
Alfred Marshall wrote that “a perfect market is
a district, small or large, in which there are
many buyers and many sellers, all so keenly on
the alert and so well acquainted in one
another’s affairs that the price of a commodity
is always practically the same for the whole of
the district.”
The focus of the present book is once again
on the U.S. segment of the global foreign
exchange market. Chapters 1-3 describe the
structure of the market and how it has
changed. Chapters 4-6 comment on the main
participant groups and the instruments that
1
l
The Foreign Exchange Market in the United States
foreword
ALL ABOUT...
Today’s over-the-counter global market in
foreign exchange meets many of the standards
that classical economists expected of a
smoothly functioning and effective market.
There are many buyers and many sellers.
Entry by new participants is generally not too
difficult. The over-the-counter market is
certainly not confined to a single geographical
area as the classical standards required.
However, with the advance of technology,
information is dispersed quickly and
efficiently around the globe, with vast
amounts of information on political and
economic developments affecting exchange
rates. As in commodity markets, identical
products are being traded in financial centers
all around the world. Essentially, the same
marks, dollars, francs, and other currencies
are being bought and sold, no matter where
the purchase takes place. Traders in different
centers are continuously in touch and buying
and selling from each other. With trading
centers open at the same time, there is no
evidence of substantial price differences
lasting more than momentarily.
systems, the price discovery process has
become less exclusive and pricing information
more broadly disseminated—at least for
certain foreign exchange products and
currency pairs. Indeed, by most measures, the
over-the-counter foreign exchange market is
regarded by observers as not only extremely
large and liquid, but also efficient and
smoothly functioning.
Many persons, both within and outside the
Federal Reserve, helped in the preparation of this
book,through advice,criticism,and drafting.
In the Federal Reserve, first and foremost, before
his tragic death, Akbar Akhtar was a close
collaborator on the project over an extended
period, contributing to all aspects of the effort
and helping to produce much of what is here.
Dino Kos and his colleagues in the Markets
Group were exceedingly helpful. Allan Malz
contributed in many important ways. Robin
Bensignor, John Kambhu, and Steven Malin
also provided much valuable assistance, and Ed
Steinberg’s contribution as editor was invaluable.
At the Federal Reserve Board, Ralph Smith
offered very useful suggestions and comments.
Not all features of today’s over-the-counter
market fully conform to the classical ideals.
There is not perfect “transparency,” or full and
immediate disclosure of all trading activity.
Individual traders know about the orders and
the flow of trading activity in their own firms,
but that information may not be known to
everyone else in the market. However,
transparency has increased enormously in
recent years. With the growth of electronic
dealing systems and electronic brokering
Outside of the Federal Reserve, Michael
Paulus of Bank of America contributed
profoundly and in many ways to the entire
project, both in technical matters and on
questions of broader philosophy. Christine
Kwon also assisted generously. Members of the
trading room staff at Morgan Guaranty were
also very helpful. At Fuji Bank, staff officials
provided valuable assistance. Richard Levich
provided very helpful comments.
The Foreign Exchange Market in the United States
l
2
 table of contents 1 of 3
ALL ABOUT...
CHAPTERS
w
FOREWORD
1
w
ONE-
Trading Foreign Exchange:
A Changing Market in a
Changing World
1. How the Global Environment Has Changed
3
2. How Foreign Exchange Turnover Has Grown
4
ä
p. 3
w
TWO-
Some Basic Concepts:
Foreign Exchange, the Foreign
Exchange Rate, Payment and
Settlement Systems ä p. 9
1. Why We Need Foreign Exchange
9
2. What “Foreign Exchange” Means
9
3. Role of the Exchange Rate
9
Bilateral and Trade-Weighted Exchange Rates
10
4. Payment and Settlement Systems
11
Payments via Fedwire and CHIPS
12
w
THREE-
Structure of the
Foreign Exchange Market
ä
1. It Is the World’s Largest Market
15
2. It Is a Twenty-Four Hour Market
16
p. 15
3. The Market Is Made Up of an International Network of Dealers
18
4. The Market’s Most Widely Traded Currency Is the Dollar
19
5. It Is an “Over-the-Counter” Market With an “Exchange-Traded” Segment
21
w
FOUR-
The Main Participants
in the Market
1. Foreign Exchange Dealers
23
2. Financial and Nonfinancial Customers
24
ä
p. 23
3. Central Banks
25
Classification of Exchange Rate Arrangements, September 1997
26
4. Brokers
27
In the Over-the-Counter Market
27
Voice Brokers
29
Automated Order-Matching or Electronic Broking Systems
29
In the Exchange-Traded Market
30
w
FIVE-
Main Instruments:
Over-the-Counter Market
ä
1. Spot
31
There Is a Buying Price and a Selling Price
32
p. 31
How Spot Rates Are Quoted: Direct and Indirect Quotes,
European and American Terms
32
There Is a Base Currency and a Terms Currency
33
Bids and Offers Are for the Base Currency
33
Quotes Are in Basis Points
34
Cross Rate Trading
34
Deriving Cross Rates From Dollar Exchange Rates
34
2. Outright Forwards
36
Relationship of Forward to Spot—Covered Interest Rate Parity
36
Role of the Offshore Deposit Markets for Euro-Dollars and Other Currencies
37
How Forward Rates Are Quoted by Traders
38
Calculating Forward Premium/Discount Points
38
Non-Deliverable Forwards (NDFs)
39
The Foreign Exchange Market in the United States
table of contents 2 of 3
ALL ABOUT...
CHAPTERS
w
FIVE-
Main Instruments:
Over-the-Counter Market
(
continued from last page
)
3. FX Swaps
40
Why FX Swaps Are Used
40
Pricing FX Swaps
41
Some Uses of FX Swaps
41
Calculating FX Swap Points
43
4. Currency Swaps
44
Purposes of Currency Swaps
44
5. Over-the-Counter Foreign Currency Options
45
The Pricing of Currency Options
48
Delta Hedging
51
Put-Call Parity
52
How Currency Options Are Traded
52
Options Combinations and Strategies
53
Foreign Exchange Options Galore
54
w
SIX-
Main Instruments:
Exchange-Traded Market
ä p. 59
1. Exchange-Traded Futures
59
Development of Foreign Currency Futures
62
Quotes for Foreign Currency Futures
63
2. Exchange-Traded Currency Options
64
3. Linkages
65
Linkages Between Main Foreign Exchange Instruments in Both
OTC and Exchange-Traded Markets
65
w
SEVEN-
How Dealers Conduct
Foreign Exchange Operations
ä
1. Trading Room Setup
67
2. The Different Kinds of Trading Functions of a Dealer Institution
68
p. 67
3. Trading Among Major Dealers—Dealing Directly and Through Brokers
69
Mechanics of Direct Dealing
69
Mechanics of Trading Through Brokers: Voice Brokers and Electronic
Brokering Systems
71
4. Operations of a Foreign Exchange Department
73
5. Back Office Payments and Settlements
75
w
EIGHT-
Managing Risk in
Foreign Exchange Trading
ä p. 77
1. Market Risk
77
Measuring and Managing Market Risk
78
Va l u e a t R i s k
7 8
2. Credit Risk
80
Settlement Risk—A Form of Credit Risk
81
Arrangements for Dealing with Settlement Risk
82
Sovereign Risk—A Form of Credit Risk
83
Group of Thirty Views on Credit Risk
83
3. Other Risks
83
The Foreign Exchange Market in the United States
  [ Pobierz całość w formacie PDF ]