Foreign Exchange Market: Definitions and Characteristics

Definitions :

The exchange is the act by which we exchange the currencies of different nations. Currencies take the same form as the currency within a country. Most of the assets 
traded currency in foreign exchange markets are deposits in banks. The rate of 
change is the price of the currency of a country in terms of the currency of another. 
There are two types of exchange rates, according to the date of exchange of real currency: the exchange rate Cash is the price for a transaction "immediate" (one or two days maximum for large transactions), the exchange rate is the price for a transaction that will occur at a at some time in the future, in 30, 90 or 180 days. Transactions in cash only that 40% of transactions. The foreign exchange market is clearly a forward market.

An exchange rate can be expressed in two ways: The listing on the "some" is to give the number of foreign monetary units equivalent to a unit of local currency rating to " 
uncertainty indicates the number of local currency units for one unit of currency 
foreign. For example, 20 January 1999, the euro price was U.S. $ 1.1571 in Paris (to quote some), or yet the dollar against euro was at 0.86472 (listing to uncertainty). When the euro appreciates against other currencies, the value quoted in certain amounts, but its market value to uncertainty decreases. Presentations subsequent tables and graphs focus on the exchange listing to uncertainty.

Key Features :

A market dominated by a few network financial In contrast to stock markets, which have a specific geographical location, the market forchanges knows no borders: there is one foreign exchange market in the world. The Currency transactions are also well and simultaneously in Paris, Tokyo, London or New York. Of by its global nature, the foreign exchange market is an economic organization without proper regulation, it is self-organized by public and private that interviennent. The foreign exchange market is geographically concentrated on the financial markets of some country. In 1998, the UK represents 32% of operations, the United States 18%, Japan 8%,Germany 5% and France 4%.

A market dominated by a few coins Transactions in foreign exchange markets are concentrated on a small number of currencies, and overwhelmingly on the dollar. In 1998, the U.S. dollar on average in 87% of identified transactions, or side or the demand side. Zone currencies euro appear in 52% of transactions (30% for the 5% mark and the franc french), the yen Japanese and the British pound are down, they are involved respectively in 21% and in 11% of transactions.

A market dominated by risky futures transactions Foreign exchange risk is the risk of capital loss associated with future changes in the exchange rate. Since the seventies, this risk has increased with the widespread floating currencies and the development of international commercial and financial transactions. The existence of exchange rate fluctuations has two different types of attitudes on the part of speakers on the market: some groups do not want to bet on what will be the rate change in the future. They are exposed to currency risk in the course of their ordinary activities and 
seek to cover their positions creditor or debtor. Other groups believe they can take a position exposed to currency risk to realize a gain. There was speculation then 
the future foreign exchange transactions through arbitration. In reality, the operations cambiaire mix to varying degrees coverage and speculation and the same individuals may adoptthese two attitudes.

The forward contract is the main way to hedge or speculate on the market 
changes. This explains why it dominates the contract of exchange spot: in 1998 63% of operations of foreign exchange markets are forward transactions and 37% of operations cash. A forward contract is an agreement to exchange one currency against another a future date at a price fixed today, the exchange rate. There are different contracts exchange term contracts based on the traditional term bank and swap broker, are most prevalent (57% of the operations of foreign exchange markets in 1998), those based on other derivatives, futures and currency options are still marginal (6% of operations 1998).

A market dominated by banks
Three groups of agents operate in the foreign exchange market: the first group is the companies, fund managers and individuals, the second meets the monetary authorities (central banks), the third group consists of banks and brokers that provide daily functioning of the market. The first group of agents do not act directly but transmit orders to the banks so-called "customer" for the purchase or sale of currencies. This is the retail market (transactions between banks and their clients) The monetary authorities intervene on the market to regulate the course (purchase and sale of foreign currency) and possibly regulate exchange transactions (foreign exchange). Foreign exchange banks and brokers are the only private parties to operate directly on the market. For this reason, the foreign exchange market is 
primarily a wholesale interbank market. In 1998, nearly 90% of transactions are cambiaire made between banks and other financial intermediaries.

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