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There is no central trading location. Trades take place through a network of computer and telephone connections all over the world.
34% of all trades take place through London (New York second at 17%). Most popular traded currency is the U.S. dollar. Accounts for 86% of all trades (euro second at 27%).
Currencies are either traded for immediate delivery (spot) or some specified future delivery (forward).
Most of the world s currencies are quoted for trade purposes on the basis of European terms.
Exceptions include: British pound, Euro, Australian dollar.
Newspapers, like the Wall Street Journal, however, usually quote both.
If a currency s forward rate is lower in value than its spot rate, the currency is being quoted at a forward discount.
For example, the British pound 6 month forward is less than its spot (2.0417 versus 2.056).
In meeting the needs of their clients and their own trading activities, these global banks establish the tone of the market. This is through a market maker function.
(2) A willingness of the market maker to actually buy and/or sell at the prices they quote:
Thus the market maker offers firm prices into the market!
Since the exchange rate is simply the ratio (i.e., value) of one currency against another, market makers express this relationship using the two currencies ISO designations. For Example: USD/JPY USD/MXN EUR/USD GBP/USD EUR/JPY (this is a cross rate; since USD in not one of them)
Recall that a market maker always provides the market with two prices, both a buy and sell quote (or price) for a currency. For Example: EUR/USD: 1.2102/1.2106
The first number quoted by the market maker is the market maker s buy price ($1.2102).
It is called the market maker s bid quote (or buy price)
The second quoted number is the market marker s sell price ($1.2106).
It is called the market maker s ask quote (or sell price)
Note: The bid quote is always lower than the ask quote.
Also, whenever the bid and ask prices are moving up, that means that the base currency is getting stronger and the quote currency is getting weaker.