Foreign Exchange Market: Definitions and Characteristics

Definitions :transactions.
The exchange is the act by which we exchange theA market dominated by risky futures
currencies of different nations. Currencies take thetransactions Foreign exchange risk is the risk of
same form as the currency within a country. Most ofcapital loss associated with future changes in the
the assets traded currency in foreign exchangeexchange rate. Since the seventies, this risk has
markets are deposits in banks. The rate of change isincreased with the widespread floating currencies and
the price of the currency of a country in terms of thethe development of international commercial and
currency of another. financial transactions. The existence of exchange
There are two types of exchange rates, according torate fluctuations has two different types of attitudes
the date of exchange of real currency: the exchangeon the part of speakers on the market: some groups
rate Cash is the price for a transaction "immediate"do not want to bet on what will be the rate change in
(one or two days maximum for large transactions),the future. They are exposed to currency risk in the
the exchange rate is the price for a transaction thatcourse of their ordinary activities and seek to cover
will occur at a at some time in the future, in 30, 90 ortheir positions creditor or debtor. Other groups believe
180 days. Transactions in cash only that 40% ofthey can take a position exposed to currency risk to
transactions. The foreign exchange market is clearly arealize a gain. There was speculation then the future
forward market.foreign exchange transactions through arbitration. In
An exchange rate can be expressed in two ways:reality, the operations cambiaire mix to varying
The listing on the "some" is to give the number ofdegrees coverage and speculation and the same
foreign monetary units equivalent to a unit of localindividuals may adoptthese two attitudes.
currency rating to " uncertainty indicates the numberThe forward contract is the main way to hedge or
of local currency units for one unit of currency foreign.speculate on the market changes. This explains why
For example, 20 January 1999, the euro price was U.S.it dominates the contract of exchange spot: in 1998
$ 1.1571 in Paris (to quote some), or yet the dollar63% of operations of foreign exchange markets are
against euro was at 0.86472 (listing to uncertainty).forward transactions and 37% of operations cash. A
When the euro appreciates against other currencies,forward contract is an agreement to exchange one
the value quoted in certain amounts, but its marketcurrency against another a future date at a price
value to uncertainty decreases. Presentationsfixed today, the exchange rate. There are different
subsequent tables and graphs focus on the exchangecontracts exchange term contracts based on the
listing to uncertainty.traditional term bank and swap broker, are most
Key Features :prevalent (57% of the operations of foreign exchange
A market dominated by a few network financial Inmarkets in 1998), those based on other derivatives,
contrast to stock markets, which have a specificfutures and currency options are still marginal (6% of
geographical location, the market forchanges knowsoperations 1998).
no borders: there is one foreign exchange market inA market dominated by banks
the world. The Currency transactions are also wellThree groups of agents operate in the foreign
and simultaneously in Paris, Tokyo, London or Newexchange market: the first group is the companies,
York. Of by its global nature, the foreign exchangefund managers and individuals, the second meets the
market is an economic organization without propermonetary authorities (central banks), the third group
regulation, it is self-organized by public and privateconsists of banks and brokers that provide daily
that interviennent. The foreign exchange market isfunctioning of the market. The first group of agents do
geographically concentrated on the financial marketsnot act directly but transmit orders to the banks
of some country. In 1998, the UK represents 32% ofso-called "customer" for the purchase or sale of
operations, the United States 18%, Japan 8%,Germanycurrencies. This is the retail market (transactions
5% and France 4%.between banks and their clients) The monetary
A market dominated by a few coins Transactions inauthorities intervene on the market to regulate the
foreign exchange markets are concentrated on acourse (purchase and sale of foreign currency) and
small number of currencies, and overwhelmingly onpossibly regulate exchange transactions (foreign
the dollar. In 1998, the U.S. dollar on average in 87%exchange). Foreign exchange banks and brokers are
of identified transactions, or side or the demand side.the only private parties to operate directly on the
Zone currencies euro appear in 52% of transactionsmarket. For this reason, the foreign exchange market
(30% for the 5% mark and the franc french), theis primarily a wholesale interbank market. In 1998,
yen Japanese and the British pound are down, theynearly 90% of transactions are cambiaire made
are involved respectively in 21% and in 11% ofbetween banks and other financial intermediaries.