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Foreignexchangemarket
FromWikipedia,thefreeencyclopedia

Theforeignexchangemarket(forex,FX,orcurrencymarket)isaglobaldecentralizedmarketforthe
tradingofcurrencies.Intermsofvolumeoftrading,itisbyfarthelargestmarketintheworld.[1]The
mainparticipantsinthismarketarethelargerinternationalbanks.Financialcentresaroundtheworld
functionasanchorsoftradingbetweenawiderangeofmultipletypesofbuyersandsellersaroundthe
clock,withtheexceptionofweekends.Theforeignexchangemarketdeterminestherelativevaluesof
differentcurrencies.[2]
Theforeignexchangemarketworksthroughfinancialinstitutions,anditoperatesonseverallevels.
Behindthescenesbanksturntoasmallernumberoffinancialfirmsknownasdealers,whoare
activelyinvolvedinlargequantitiesofforeignexchangetrading.Mostforeignexchangedealersare
banks,sothisbehindthescenesmarketissometimescalledtheinterbankmarket,althoughafew
insurancecompaniesandotherkindsoffinancialfirmsareinvolved.Tradesbetweenforeignexchange
dealerscanbeverylarge,involvinghundredsofmillionsofdollars.Becauseofthesovereigntyissue
wheninvolvingtwocurrencies,forexhaslittle(ifany)supervisoryentityregulatingitsactions.
Theforeignexchangemarketassistsinternationaltradeandinvestmentsbyenablingcurrency
conversion.Forexample,itpermitsabusinessintheUnitedStatestoimportgoodsfromtheEuropean
Unionmemberstates,especiallyEurozonemembers,andpayEuros,eventhoughitsincomeisinUnited
Statesdollars.Italsosupportsdirectspeculationandevaluationrelativetothevalueofcurrencies,and
thecarrytrade,speculationbasedontheinterestratedifferentialbetweentwocurrencies.[3]
Inatypicalforeignexchangetransaction,apartypurchasessomequantityofonecurrencybypaying
withsomequantityofanothercurrency.Themodernforeignexchangemarketbeganformingduringthe
1970safterthreedecadesofgovernmentrestrictionsonforeignexchangetransactions(theBretton
Woodssystemofmonetarymanagementestablishedtherulesforcommercialandfinancialrelations
amongtheworld'smajorindustrialstatesafterWorldWarII),whencountriesgraduallyswitchedto
floatingexchangeratesfromthepreviousexchangerateregime,whichremainedfixedaspertheBretton
Woodssystem.
Theforeignexchangemarketisuniquebecauseofthefollowingcharacteristics:
itshugetradingvolumerepresentingthelargestassetclassintheworldleadingtohighliquidity
itsgeographicaldispersion
itscontinuousoperation:24hoursadayexceptweekends,i.e.,tradingfrom22:00GMTon
Sunday(Sydney)until22:00GMTFriday(NewYork)
thevarietyoffactorsthataffectexchangerates
thelowmarginsofrelativeprofitcomparedwithothermarketsoffixedincomeand
theuseofleveragetoenhanceprofitandlossmarginsandwithrespecttoaccountsize.
Assuch,ithasbeenreferredtoasthemarketclosesttotheidealofperfectcompetition,notwithstanding
currencyinterventionbycentralbanks.
AccordingtotheBankforInternationalSettlements,[4]thepreliminaryglobalresultsfromthe2013
TriennialCentralBankSurveyofForeignExchangeandOTCDerivativesMarketsActivityshowthat
tradinginforeignexchangemarketsaveraged$5.3trillionperdayinApril2013.Thisisupfrom$4.0
trillioninApril2010and$3.3trillioninApril2007.Foreignexchangeswapswerethemostactively
tradedinstrumentsinApril2013,at$2.2trillionperday,followedbyspottradingat$2.0trillion.
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AccordingtotheBankforInternationalSettlements,[5]asofApril2010,averagedailyturnoveringlobal
foreignexchangemarketsisestimatedat$3.98trillion,agrowthofapproximately20%overthe$3.21
trilliondailyvolumeasofApril2007.Somefirmsspecializingonforeignexchangemarkethadputthe
averagedailyturnoverinexcessofUS$4trillion.[6]The$3.98trillionbreakdownisasfollows:
$1.490trillioninspottransactions
$475billioninoutrightforwards
$1.765trillioninforeignexchangeswaps
$43billioncurrencyswaps
$207billioninoptionsandotherproducts

Contents
1History
1.1Ancient
1.2Medievalandlater
1.3Earlymodern
1.4Moderntopostmodern
1.4.1AfterWWII
1.4.2Marketsclose
1.4.3After1973
2Marketsizeandliquidity
3Marketparticipants
3.1Commercialcompanies
3.2Centralbanks
3.3Foreignexchangefixing
3.4Hedgefundsasspeculators
3.5Investmentmanagementfirms
3.6Retailforeignexchangetraders
3.7Nonbankforeignexchangecompanies
3.8Moneytransfer/remittancecompaniesandbureauxdechange
4Tradingcharacteristics
5Determinantsofexchangerates
5.1Economicfactors
5.2Politicalconditions
5.3Marketpsychology
6Financialinstruments
6.1Spot
6.2Forward
6.3Swap
6.4Futures
6.5Option
7Speculation
8Riskaversion
9Carrytrade
10Forexsignals
11Seealso
12References
13Externallinks

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History
Ancient
Currencytradingandexchangefirstoccurredinancienttimes.[7]Moneychangingpeople,people
helpingotherstochangemoneyandalsotakingacommissionorchargingafeewerelivinginthetimes
oftheTalmudicwritings(Biblicaltimes).Thesepeople(sometimescalled"kollybists")usedcitystalls,
atfeasttimesthetemplesCourtoftheGentilesinstead.[8]Moneychangerswerealsoinmorerecent
ancienttimessilversmithsand/orgoldsmiths.[9]
Duringthe4thcentury,theByzantinegovernmentkeptamonopolyontheexchangeofcurrency.[10]
PapyriPCZI59021(c.259/8BC),showstheoccurrencesofexchangeofcoinagewithinAncientEgypt.
[11]

Currencyandexchangewasalsoavitalandcrucialelementoftradeduringtheancientworldsothat
peoplecouldbuyandsellitemslikefood,potteryandrawmaterials.[12]IfaGreekcoinheldmoregold
thananEgyptiancoinduetoitssizeorcontent,thenamerchantcouldbarterfewerGreekgoldcoinsfor
moreEgyptianones,orformorematerialgoods.Thisiswhy,atsomepointintheirhistory,mostworld
currenciesincirculationtodayhadavaluefixedtoaspecificquantityofarecognizedstandardlike
silverandgold.

Medievalandlater
Duringthe15thcentury,theMedicifamilywererequiredtoopenbanksatforeignlocationsinorderto
exchangecurrenciestoactonbehalfoftextilemerchants.[13][14]Tofacilitatetradethebankcreatedthe
nostro(fromItaliantranslated"ours")accountbookwhichcontainedtwocolumnedentriesshowing
amountsofforeignandlocalcurrencies,informationpertainingtothekeepingofanaccountwitha
foreignbank.[15][16][17][18]Duringthe17th(or18th)century,Amsterdammaintainedanactiveforex
market.[19]In1704,foreignexchangetookplacebetweenagentsactingintheinterestsoftheKingdom
ofEnglandandtheCountyofHolland.[20]

Earlymodern
Alex.Brown&Sonstradedforeigncurrenciesexchangesometimeabout1850andwasaleading
participantinthiswithinU.S.A.[21]During1880,J.M.doEspritoSantodeSilva(BancoEspritoSanto)
appliedforandwasgivenpermissiontobegintoengageinaforeignexchangetradingbusiness.[22][23]
Theyear1880isconsideredbyatleastonesourcetobethebeginningofmodernforeignexchange,
significantforthefactofthebeginningofthegoldstandardduringtheyear.[24]
Priortothefirstworldwar,therewasamuchmorelimitedcontrolofinternationaltrade.Motivatedby
theoutsetofwar,countriesabandonedthegoldstandardmonetarysystem.[25]

Moderntopostmodern
From1899to1913,holdingsofcountries'foreignexchangeincreasedatanannualrateof10.8%,while
holdingsofgoldincreasedatanannualrateof6.3%between1903and1913.[26]
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Atthetimeoftheclosingoftheyear1913,nearlyhalfoftheworld'sforeignexchangewasconducted
usingthePoundsterling.[27]ThenumberofforeignbanksoperatingwithintheboundariesofLondon
increasedfrom3in1860to71in1913.In1902,therewerealtogethertwoLondonforeignexchange
brokers.[28]Duringtheearliestyearsofthe20thcentury,tradewasmostactiveinParis,NewYorkand
Berlin,whileBritainremainedlargelyuninvolvedintradeuntil1914.Between1919and1922,the
employmentofforeignexchangebrokerswithinLondonincreasedto17,in1924therewere40firms
operatingforthepurposesofexchange.[29]Duringthe1920stheoccurrenceoftradeinLondon
resembledmorethemodernmanifestation,by1928forextradewasintegraltothefinancialfunctioning
ofthecity.Continentalexchangecontrols,plusotherfactors,inEuropeandLatinAmerica,hampered
anyattemptatwholesaleprosperityfromtradeforthoseof1930'sLondon.[30]
Duringthe1920s,theKleinwortfamilywereknowntobetheleadersoftheforeignexchangemarket
whileJapheth,Montagu&Co.,andSeligmanstillwarrantrecognitionassignificantFXtraders.[31]
AfterWWII
AfterWWII,theBrettonWoodsAccordwassignedallowingcurrenciestofluctuatewithinarangeof
1%tothecurrenciespar.[32]InJapanthelawwaschangedduring1954bytheForeignExchangeBank
Law,so,theBankofTokyowastobecome,becauseofthis,thecentreofforeignexchangeby
Septemberofthatyear.Between1954and1959Japaneselawwasmadetoallowtheinclusionofmany
moreOccidentalcurrenciesinJapaneseforex.[33]
U.S.PresidentRichardNixoniscreditedwithendingtheBrettonWoodsAccordandfixedratesof
exchange,eventuallybringingaboutafreefloatingcurrencysystem.Aftertheceasingoftheenactment
ofthe"BrettonWoodsAccord"during1971,[34]theSmithsonianAgreementallowedtradingtorangeto
2%.During196162,theamountofforeignoperationsbytheU.S.FederalReservewasrelatively
low.[35][36]ThoseinvolvedincontrollingexchangeratesfoundtheboundariesoftheAgreementwere
notrealisticandsoceasedthisinMarch1973,whensometimeafterwardnoneofthemajorcurrencies
weremaintainedwithacapacityforconversiontogold,organisationsreliedinsteadonreservesof
currency.[37][38]During1970to1973theamountoftradesoccurringinthemarketincreasedthree
fold.[39][40][41]Atsometime(accordingtoGandolfoduringFebruaryMarch1973)someofthemarkets'
were"split",soatwotiercurrencymarketwassubsequentlyintroduced,withdualcurrencyrates.This
wasabolishedduringMarch1974.[42][43][44]
ReutersintroducedduringJune1973computermonitors,replacingthetelephonesandtelexused
previouslyfortradingquotes.[45]
Marketsclose
DuetotheultimateineffectivenessoftheBrettonWoodsAccordandtheEuropeanJointFloattheforex
marketswereforcedtoclosesometimeduring1972andMarch1973.[46][47]Theverylargestofall
purchasesofdollarsinthehistoryof1976waswhentheWestGermangovernmentachievedanalmost3
billiondollaracquisition(afiguregivenas2.75billionintotalbyTheStatesman:Volume181974),this
eventindicatedtheimpossibilityofthebalancingofexchangestabilitiesbythemeasuresofcontrolused
atthetimeandthemonetarysystemandtheforeignexchangemarketsin"West"Germanyandother
countrieswithinEuropeclosedfortwoweeks(duringFebruaryand,or,March1973.Giersch,Paqu,&

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Schmiedingstateclosedafterpurchaseof"7.5millionDmarks"Brawleystates"...Exchangemarkets
hadtobeclosed.Whentheyreopened...March1"thatisalargepurchaseoccurredafterthe
close).[48][49][50][51]
After1973
Theyear1973marksthepointtowhichnationstate,bankingtradeandcontrolledforeignexchange
endedandcompletefloating,relativelyfreeconditionsofamarketcharacteristicofthesituationin
contemporarytimesbegan(accordingtoonesource),[52]althoughanotherstatesthefirsttimeacurrency
pairweregivenasanoptionforU.S.A.traderstopurchasewasduring1982,withadditionalcurrencies
availablebythenextyear.[53][54]
On1January1981,aspartofchangesbeginningduring1978,thePeople'sBankofChinaallowed
certaindomestic"enterprises"toparticipateinforeignexchangetrading.[55][56]Sometimeduring1981,
theSouthKoreangovernmentendedforexcontrolsandallowedfreetradetooccurforthefirsttime.
During1988thecountriesgovernmentacceptedtheIMFquotaforinternationaltrade.[57]
InterventionbyEuropeanbanksespeciallytheBundesbankinfluencedtheforexmarket,on27February
1985particularly.[58]Thegreatestproportionofalltradesworldwideduring1987werewithinthe
UnitedKingdom,slightlyoveronequarter,withtheU.S.ofAmericathenationwiththesecondmost
placesinvolvedintrading.[59]
During1991therepublicofIranchangedinternationalagreementswithsomecountriesfromoilbarter
toforeignexchange.[60]

Marketsizeandliquidity
Theforeignexchangemarketisthemostliquid
financialmarketintheworld.Tradersincludelarge
banks,centralbanks,institutionalinvestors,currency
speculators,corporations,governments,other
financialinstitutions,andretailinvestors.The
averagedailyturnoverintheglobalforeign
exchangeandrelatedmarketsiscontinuously
growing.Accordingtothe2010TriennialCentral
BankSurvey,coordinatedbytheBankfor
InternationalSettlements,averagedailyturnover
wasUS$3.98trillioninApril2010(vs$1.7trillion
in1998).[5]Ofthis$3.98trillion,$1.5trillionwas
spottransactionsand$2.5trillionwastradedin
outrightforwards,swapsandotherderivatives.

Mainforeignexchangemarketturnover,1988
2007,measuredinbillionsofUSD.

InApril2010,tradingintheUnitedKingdomaccountedfor36.7%ofthetotal,makingitbyfarthemost
importantcentreforforeignexchangetrading.TradingintheUnitedStatesaccountedfor17.9%and
Japanaccountedfor6.2%.[61]
InApril2013,forthefirsttime,SingaporesurpassedJapaninaveragedailyforeignexchangetrading
volumewith$383billionperday.Sotherankbecame:theUnitedKingdom(41%),theUnitedStates
(19%),Singapore(5.7)%,Japan(5.6%)andHongKong(4.1%).[62]
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Turnoverofexchangetradedforeignexchangefuturesandoptionshavegrownrapidlyinrecentyears,
reaching$166billioninApril2010(doubletheturnoverrecordedinApril2007).Exchangetraded
currencyderivativesrepresent4%ofOTCforeignexchangeturnover.Foreignexchangefutures
contractswereintroducedin1972attheChicagoMercantileExchangeandareactivelytradedrelativeto
mostotherfuturescontracts.
Mostdevelopedcountriespermitthetradingofderivativeproducts(likefuturesandoptionsonfutures)
ontheirexchanges.Allthesedevelopedcountriesalreadyhavefullyconvertiblecapitalaccounts.Some
governmentsofemergingmarketsdonotallowforeignexchangederivativeproductsontheirexchanges
becausetheyhavecapitalcontrols.Theuseofderivativesisgrowinginmanyemergingeconomies.[63]
CountriessuchasSouthKorea,SouthAfrica,andIndiahaveestablishedcurrencyfuturesexchanges,
despitehavingsomecapitalcontrols.
Foreignexchangetradingincreasedby20%betweenApril2007andApril2010andhasmorethan
doubledsince2004.[64]Theincreaseinturnoverisduetoanumberoffactors:thegrowingimportance
offoreignexchangeasanassetclass,theincreasedtradingactivityofhighfrequencytraders,andthe
emergenceofretailinvestorsasanimportantmarketsegment.Thegrowthofelectronicexecutionand
thediverseselectionofexecutionvenueshasloweredtransactioncosts,increasedmarketliquidity,and
attractedgreaterparticipationfrommanycustomertypes.Inparticular,electronictradingviaonline
portalshasmadeiteasierforretailtraderstotradeintheforeignexchangemarket.By2010,retail
tradingisestimatedtoaccountforupto10%ofspotturnover,or$150billionperday(seebelow:Retail
foreignexchangetraders).
Foreignexchangeisanoverthecountermarketwherebrokers/dealersnegotiatedirectlywithone
another,sothereisnocentralexchangeorclearinghouse.Thebiggestgeographictradingcenteristhe
UnitedKingdom,primarilyLondon,whichaccordingtoTheCityUKestimateshasincreaseditsshareof
globalturnoverintraditionaltransactionsfrom34.6%inApril2007to36.7%inApril2010.Dueto
London'sdominanceinthemarket,aparticularcurrency'squotedpriceisusuallytheLondonmarket
price.Forinstance,whentheInternationalMonetaryFundcalculatesthevalueofitsspecialdrawing
rightseveryday,theyusetheLondonmarketpricesatnoonthatday.

Marketparticipants
Unlikeastockmarket,theforeignexchangemarketisdividedintolevelsofaccess.Atthetopisthe
interbankmarket,whichismadeupofthelargestcommercialbanksandsecuritiesdealers.Withinthe
interbankmarket,spreads,whicharethedifferencebetweenthebidandaskprices,arerazorsharpand
notknowntoplayersoutsidetheinnercircle.Thedifferencebetweenthebidandaskpriceswidens(for
examplefrom0to1pipto12pipsforcurrenciessuchastheEUR)asyougodownthelevelsof
access.Thisisduetovolume.Ifatradercanguaranteelargenumbersoftransactionsforlargeamounts,
theycandemandasmallerdifferencebetweenthebidandaskprice,whichisreferredtoasabetter
spread.Thelevelsofaccessthatmakeuptheforeignexchangemarketaredeterminedbythesizeofthe
"line"(theamountofmoneywithwhichtheyaretrading).Thetoptierinterbankmarketaccountsfor
39%ofalltransactions.[61]Fromthere,smallerbanks,followedbylargemultinationalcorporations
(whichneedtohedgeriskandpayemployeesindifferentcountries),largehedgefunds,andevensome
oftheretailmarketmakers.AccordingtoGalatiandMelvin,Pensionfunds,insurancecompanies,
mutualfunds,andotherinstitutionalinvestorshaveplayedanincreasinglyimportantroleinfinancial
marketsingeneral,andinFXmarketsinparticular,sincetheearly2000s.(2004)Inaddition,henotes,
Hedgefundshavegrownmarkedlyoverthe20012004periodintermsofbothnumberandoverall
size.[66]Centralbanksalsoparticipateintheforeignexchangemarkettoaligncurrenciestotheir
economicneeds.
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Top10currencytraders[65]

Commercialcompanies

%ofoverallvolume,May2015

Animportantpartoftheforeignexchange
marketcomesfromthefinancialactivities
ofcompaniesseekingforeignexchangeto
payforgoodsorservices.Commercial
companiesoftentradefairlysmallamounts
comparedtothoseofbanksorspeculators,
andtheirtradesoftenhavelittleshortterm
impactonmarketrates.Nevertheless,trade
flowsareanimportantfactorinthelong
termdirectionofacurrency'sexchange
rate.Somemultinationalcorporations
(MNCs)canhaveanunpredictableimpact
whenverylargepositionsarecovereddue
toexposuresthatarenotwidelyknownby
othermarketparticipants.

Rank

Name

Marketshare

Citi

16.11%

DeutscheBank

14.54%

BarclaysInvestmentBank

8.11%

JPMorgan

7.65%

UBSAG

7.30%

BankofAmericaMerrillLynch

6.22%

HSBC

5.40%

BNPParibas

3.65%

GoldmanSachs

3.40%

10

RoyalBankofScotland

3.38%

Centralbanks
Nationalcentralbanksplayanimportantroleintheforeignexchangemarkets.Theytrytocontrolthe
moneysupply,inflation,and/orinterestratesandoftenhaveofficialorunofficialtargetratesfortheir
currencies.Theycanusetheiroftensubstantialforeignexchangereservestostabilizethemarket.
Nevertheless,theeffectivenessofcentralbank"stabilizingspeculation"isdoubtfulbecausecentral
banksdonotgobankruptiftheymakelargelosses,likeothertraderswould,andthereisnoconvincing
evidencethattheydomakeaprofittrading.

Foreignexchangefixing
Foreignexchangefixingisthedailymonetaryexchangeratefixedbythenationalbankofeachcountry.
Theideaisthatcentralbanksusethefixingtimeandexchangeratetoevaluatebehavioroftheir
currency.Fixingexchangeratesreflectstherealvalueofequilibriuminthemarket.Banks,dealersand
tradersusefixingratesasatrendindicator.
Themereexpectationorrumorofacentralbankforeignexchangeinterventionmightbeenoughto
stabilizeacurrency,butaggressiveinterventionmightbeusedseveraltimeseachyearincountrieswith
adirtyfloatcurrencyregime.Centralbanksdonotalwaysachievetheirobjectives.Thecombined
resourcesofthemarketcaneasilyoverwhelmanycentralbank.[67]Severalscenariosofthisnaturewere
seeninthe199293EuropeanExchangeRateMechanismcollapse,andinmorerecenttimesinAsia.

Hedgefundsasspeculators
About70%to90%oftheforeignexchangetransactionsconductedarespeculative.Thismeansthe
personorinstitutionthatboughtorsoldthecurrencyhasnoplantoactuallytakedeliveryofthecurrency
intheendrather,theyweresolelyspeculatingonthemovementofthatparticularcurrency.Since1996,
hedgefundshavegainedareputationforaggressivecurrencyspeculation.Theycontrolbillionsof
dollarsofequityandmayborrowbillionsmore,andthusmayoverwhelminterventionbycentralbanks
tosupportalmostanycurrency,iftheeconomicfundamentalsareinthehedgefunds'favor.

Investmentmanagementfirms
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Investmentmanagementfirms(whotypicallymanagelargeaccountsonbehalfofcustomerssuchas
pensionfundsandendowments)usetheforeignexchangemarkettofacilitatetransactionsinforeign
securities.Forexample,aninvestmentmanagerbearinganinternationalequityportfolioneedsto
purchaseandsellseveralpairsofforeigncurrenciestopayforforeignsecuritiespurchases.
Someinvestmentmanagementfirmsalsohavemorespeculativespecialistcurrencyoverlayoperations,
whichmanageclients'currencyexposureswiththeaimofgeneratingprofitsaswellaslimitingrisk.
Whilethenumberofthistypeofspecialistfirmsisquitesmall,manyhavealargevalueofassetsunder
managementand,hence,cangeneratelargetrades.

Retailforeignexchangetraders
Individualretailspeculativetradersconstituteagrowingsegmentofthismarketwiththeadventofretail
foreignexchangetrading,bothinsizeandimportance.Currently,theyparticipateindirectlythrough
brokersorbanks.Retailbrokers,whilelargelycontrolledandregulatedintheUSAbytheCommodity
FuturesTradingCommissionandNationalFuturesAssociation,haveinthepastbeensubjectedto
periodicforeignexchangefraud.[68][69]Todealwiththeissue,in2010theNFArequireditsmembers
thatdealintheForexmarketstoregisterassuch(I.e.,ForexCTAinsteadofaCTA).ThoseNFA
membersthatwouldtraditionallybesubjecttominimumnetcapitalrequirements,FCMsandIBs,are
subjecttogreaterminimumnetcapitalrequirementsiftheydealinForex.Anumberoftheforeign
exchangebrokersoperatefromtheUKunderFinancialServicesAuthorityregulationswhereforeign
exchangetradingusingmarginispartofthewideroverthecounterderivativestradingindustrythat
includesContractfordifferencesandfinancialspreadbetting.
TherearetwomaintypesofretailFXbrokersofferingtheopportunityforspeculativecurrencytrading:
brokersanddealersormarketmakers.BrokersserveasanagentofthecustomerinthebroaderFX
market,byseekingthebestpriceinthemarketforaretailorderanddealingonbehalfoftheretail
customer.Theychargeacommissionormarkupinadditiontothepriceobtainedinthemarket.Dealers
ormarketmakers,bycontrast,typicallyactasprincipalinthetransactionversustheretailcustomer,and
quoteapricetheyarewillingtodealat.

Nonbankforeignexchangecompanies
Nonbankforeignexchangecompaniesoffercurrencyexchangeandinternationalpaymentstoprivate
individualsandcompanies.Thesearealsoknownasforeignexchangebrokersbutaredistinctinthat
theydonotofferspeculativetradingbutrathercurrencyexchangewithpayments(i.e.,thereisusuallya
physicaldeliveryofcurrencytoabankaccount).
ItisestimatedthatintheUK,14%ofcurrencytransfers/paymentsaremadeviaForeignExchange
Companies.[70]Thesecompanies'sellingpointisusuallythattheywillofferbetterexchangeratesor
cheaperpaymentsthanthecustomer'sbank.[71]ThesecompaniesdifferfromMoney
Transfer/RemittanceCompaniesinthattheygenerallyofferhighervalueservices.

Moneytransfer/remittancecompaniesandbureauxdechange
Moneytransfercompanies/remittancecompaniesperformhighvolumelowvaluetransfersgenerallyby
economicmigrantsbacktotheirhomecountry.In2007,theAiteGroupestimatedthattherewere$369
billionofremittances(anincreaseof8%onthepreviousyear).Thefourlargestmarkets(India,China,
MexicoandthePhilippines)receive$95billion.ThelargestandbestknownproviderisWesternUnion
with345,000agentsgloballyfollowedbyUAEExchange.
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Bureauxdechangeorcurrencytransfercompaniesprovidelowvalueforeignexchangeservicesfor
travelers.Thesearetypicallylocatedatairportsandstationsorattouristlocationsandallowphysical
notestobeexchangedfromonecurrencytoanother.Theyaccesstheforeignexchangemarketsvia
banksornonbankforeignexchangecompanies.

Tradingcharacteristics
Thereisnounifiedorcentrally
Mosttradedcurrenciesbyvalue
clearedmarketforthemajorityof
Currencydistributionofglobalforeignexchangemarketturnover[72][5]
trades,andthereisverylittlecross
borderregulation.Duetotheover
ISO4217code %dailyshare
Rank
Currency
thecounter(OTC)natureofcurrency
(Symbol)
(April2013)
markets,thereareratheranumberof
1
UnitedStatesdollar
USD($)
87.0%
interconnectedmarketplaces,where
2
Euro
EUR()
33.4%
differentcurrenciesinstrumentsare
traded.Thisimpliesthatthereisnot
3
Japaneseyen
JPY()
23.0%
asingleexchangeratebutrathera
4
Poundsterling
GBP()
11.8%
numberofdifferentrates(prices),
5
Australiandollar
AUD($)
8.6%
dependingonwhatbankormarket
makeristrading,andwhereitis.In
6
Swissfranc
CHF(Fr)
5.2%
practicetheratesarequiteclosedue
7
Canadiandollar
CAD($)
4.6%
toarbitrage.DuetoLondon's
8
Mexicanpeso
MXN($)
2.5%
dominanceinthemarket,aparticular
currency'squotedpriceisusuallythe
9
Chineseyuan
CNY()
2.2%
Londonmarketprice.Majortrading
10
NewZealanddollar
NZD($)
2.0%
exchangesincludeElectronic
11
Swedishkrona
SEK(kr)
1.8%
BrokingServices(EBS)and
ThomsonReutersDealing,while
12
Russianruble
RUB()
1.6%
majorbanksalsooffertrading
13
HongKongdollar
HKD($)
1.4%
systems.Ajointventureofthe
14
Norwegiankrone
NOK(kr)
1.4%
ChicagoMercantileExchangeand
Reuters,calledFxmarketspace
Singaporedollar
15
SGD($)
1.4%
openedin2007andaspiredbutfailed
totheroleofacentralmarket
16
Turkishlira
TRY()
1.3%
clearingmechanism.
17
SouthKoreanwon
KRW()
1.2%
ThemaintradingcentersareLondon
18
SouthAfricanrand
ZAR(R)
1.1%
andNewYorkCity,thoughTokyo,
19
Brazilianreal
BRL(R$)
1.1%
HongKongandSingaporeareall
Indianrupee
importantcentersaswell.Banks
20
1.0%
INR()
throughouttheworldparticipate.
Other
6.3%
Currencytradinghappens
200%
Total[73]
continuouslythroughoutthedayas
theAsiantradingsessionends,the
Europeansessionbegins,followedbytheNorthAmericansessionandthenbacktotheAsiansession,
excludingweekends.
Fluctuationsinexchangeratesareusuallycausedbyactualmonetaryflowsaswellasbyexpectationsof
changesinmonetaryflowscausedbychangesingrossdomesticproduct(GDP)growth,inflation
(purchasingpowerparitytheory),interestrates(interestrateparity,DomesticFishereffect,International
Fishereffect),budgetandtradedeficitsorsurpluses,largecrossborderM&Adealsandother
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macroeconomicconditions.Majornewsisreleasedpublicly,oftenonscheduleddates,somanypeople
haveaccesstothesamenewsatthesametime.However,thelargebankshaveanimportantadvantage
theycanseetheircustomers'orderflow.
Currenciesaretradedagainstoneanotherinpairs.Eachcurrencypairthusconstitutesanindividual
tradingproductandistraditionallynotedXXXYYYorXXX/YYY,whereXXXandYYYaretheISO
4217internationalthreelettercodeofthecurrenciesinvolved.Thefirstcurrency(XXX)isthebase
currencythatisquotedrelativetothesecondcurrency(YYY),calledthecountercurrency(orquote
currency).Forinstance,thequotationEURUSD(EUR/USD)1.5465isthepriceoftheEuroexpressedin
USdollars,meaning1euro=1.5465dollars.Themarketconventionistoquotemostexchangerates
againsttheUSDwiththeUSdollarasthebasecurrency(e.g.USDJPY,USDCAD,USDCHF).The
exceptionsaretheBritishpound(GBP),Australiandollar(AUD),theNewZealanddollar(NZD)and
theeuro(EUR)wheretheUSDisthecountercurrency(e.g.GBPUSD,AUDUSD,NZDUSD,
EURUSD).
ThefactorsaffectingXXXwillaffectbothXXXYYYandXXXZZZ.Thiscausespositivecurrency
correlationbetweenXXXYYYandXXXZZZ.
Onthespotmarket,accordingtothe2013TriennialSurvey,themostheavilytradedbilateralcurrency
pairswere:
EURUSD:24.1%
USDJPY:18.3%
GBPUSD(alsocalledcable):8.8%
andtheUScurrencywasinvolvedin87.0%oftransactions,followedbytheeuro(33.4%),theyen
(23.0%),andsterling(11.8%)(seetable).Volumepercentagesforallindividualcurrenciesshouldadd
upto200%,aseachtransactioninvolvestwocurrencies.
Tradingintheeurohasgrownconsiderablysincethecurrency'screationinJanuary1999,andhowlong
theforeignexchangemarketwillremaindollarcenteredisopentodebate.Untilrecently,tradingthe
euroversusanonEuropeancurrencyZZZwouldhaveusuallyinvolvedtwotrades:EURUSDand
USDZZZ.TheexceptiontothisisEURJPY,whichisanestablishedtradedcurrencypairinthe
interbankspotmarket.

Determinantsofexchangerates
Thefollowingtheoriesexplainthefluctuationsinexchangeratesinafloatingexchangerateregime(Ina
fixedexchangerateregime,ratesaredecidedbyitsgovernment):
1. Internationalparityconditions:Relativepurchasingpowerparity,interestrateparity,Domestic
Fishereffect,InternationalFishereffect.Thoughtosomeextenttheabovetheoriesprovidelogical
explanationforthefluctuationsinexchangerates,yetthesetheoriesfalterastheyarebasedon
challengeableassumptions[e.g.,freeflowofgoods,servicesandcapital]whichseldomholdtrue
intherealworld.
2. Balanceofpaymentsmodel:Thismodel,however,focuseslargelyontradablegoodsandservices,
ignoringtheincreasingroleofglobalcapitalflows.Itfailedtoprovideanyexplanationfor
continuousappreciationofdollarduringthe1980sandmostpartofthe1990sinfaceofsoaring
UScurrentaccountdeficit.
3. Assetmarketmodel:viewscurrenciesasanimportantassetclassforconstructinginvestment
portfolios.Assetspricesareinfluencedmostlybypeople'swillingnesstoholdtheexisting
quantitiesofassets,whichinturndependsontheirexpectationsonthefutureworthofthese
assets.Theassetmarketmodelofexchangeratedeterminationstatesthattheexchangerate
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betweentwocurrenciesrepresentsthepricethatjustbalancestherelativesuppliesof,anddemand
for,assetsdenominatedinthosecurrencies.
Noneofthemodelsdevelopedsofarsucceedtoexplainexchangeratesandvolatilityinthelongertime
frames.Forshortertimeframes(lessthanafewdays),algorithmscanbedevisedtopredictprices.Itis
understoodfromtheabovemodelsthatmanymacroeconomicfactorsaffecttheexchangeratesandin
theendcurrencypricesarearesultofdualforcesofdemandandsupply.Theworld'scurrencymarkets
canbeviewedasahugemeltingpot:inalargeandeverchangingmixofcurrentevents,supplyand
demandfactorsareconstantlyshifting,andthepriceofonecurrencyinrelationtoanothershifts
accordingly.Noothermarketencompasses(anddistills)asmuchofwhatisgoingonintheworldatany
giventimeasforeignexchange.[74]
Supplyanddemandforanygivencurrency,andthusitsvalue,arenotinfluencedbyanysingleelement,
butratherbyseveral.Theseelementsgenerallyfallintothreecategories:economicfactors,political
conditionsandmarketpsychology.

Economicfactors
Theseinclude:(a)economicpolicy,disseminatedbygovernmentagenciesandcentralbanks,(b)
economicconditions,generallyrevealedthrougheconomicreports,andothereconomicindicators.
Economicpolicycomprisesgovernmentfiscalpolicy(budget/spendingpractices)andmonetary
policy(themeansbywhichagovernment'scentralbankinfluencesthesupplyand"cost"of
money,whichisreflectedbythelevelofinterestrates).
Governmentbudgetdeficitsorsurpluses:Themarketusuallyreactsnegativelytowidening
governmentbudgetdeficits,andpositivelytonarrowingbudgetdeficits.Theimpactisreflectedin
thevalueofacountry'scurrency.
Balanceoftradelevelsandtrends:Thetradeflowbetweencountriesillustratesthedemandfor
goodsandservices,whichinturnindicatesdemandforacountry'scurrencytoconducttrade.
Surplusesanddeficitsintradeofgoodsandservicesreflectthecompetitivenessofanation's
economy.Forexample,tradedeficitsmayhaveanegativeimpactonanation'scurrency.
Inflationlevelsandtrends:Typicallyacurrencywilllosevalueifthereisahighlevelofinflation
inthecountryorifinflationlevelsareperceivedtoberising.Thisisbecauseinflationerodes
purchasingpower,thusdemand,forthatparticularcurrency.However,acurrencymaysometimes
strengthenwheninflationrisesbecauseofexpectationsthatthecentralbankwillraiseshortterm
interestratestocombatrisinginflation.
Economicgrowthandhealth:ReportssuchasGDP,employmentlevels,retailsales,capacity
utilizationandothers,detailthelevelsofacountry'seconomicgrowthandhealth.Generally,the
morehealthyandrobustacountry'seconomy,thebetteritscurrencywillperform,andthemore
demandforittherewillbe.
Productivityofaneconomy:Increasingproductivityinaneconomyshouldpositivelyinfluence
thevalueofitscurrency.Itseffectsaremoreprominentiftheincreaseisinthetradedsector.[75]

Politicalconditions
Internal,regional,andinternationalpoliticalconditionsandeventscanhaveaprofoundeffecton
currencymarkets.
Allexchangeratesaresusceptibletopoliticalinstabilityandanticipationsaboutthenewrulingparty.
Politicalupheavalandinstabilitycanhaveanegativeimpactonanation'seconomy.Forexample,
destabilizationofcoalitiongovernmentsinPakistanandThailandcannegativelyaffectthevalueoftheir

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currencies.Similarly,inacountryexperiencingfinancialdifficulties,theriseofapoliticalfactionthatis
perceivedtobefiscallyresponsiblecanhavetheoppositeeffect.Also,eventsinonecountryinaregion
mayspurpositive/negativeinterestinaneighboringcountryand,intheprocess,affectitscurrency.

Marketpsychology
Marketpsychologyandtraderperceptionsinfluencetheforeignexchangemarketinavarietyofways:
Flightstoquality:Unsettlinginternationaleventscanleadtoa"flighttoquality",atypeofcapital
flightwherebyinvestorsmovetheirassetstoaperceived"safehaven".Therewillbeagreater
demand,thusahigherprice,forcurrenciesperceivedasstrongerovertheirrelativelyweaker
counterparts.TheUSdollar,Swissfrancandgoldhavebeentraditionalsafehavensduringtimes
ofpoliticaloreconomicuncertainty.[76]
Longtermtrends:Currencymarketsoftenmoveinvisiblelongtermtrends.Althoughcurrencies
donothaveanannualgrowingseasonlikephysicalcommodities,businesscyclesdomake
themselvesfelt.Cycleanalysislooksatlongertermpricetrendsthatmayrisefromeconomicor
politicaltrends.[77]
"Buytherumor,sellthefact":Thismarkettruismcanapplytomanycurrencysituations.Itisthe
tendencyforthepriceofacurrencytoreflecttheimpactofaparticularactionbeforeitoccursand,
whentheanticipatedeventcomestopass,reactinexactlytheoppositedirection.Thismayalsobe
referredtoasamarketbeing"oversold"or"overbought".[78]Tobuytherumororsellthefactcan
alsobeanexampleofthecognitivebiasknownasanchoring,wheninvestorsfocustoomuchon
therelevanceofoutsideeventstocurrencyprices.
Economicnumbers:Whileeconomicnumberscancertainlyreflecteconomicpolicy,somereports
andnumberstakeonatalismanlikeeffect:thenumberitselfbecomesimportanttomarket
psychologyandmayhaveanimmediateimpactonshorttermmarketmoves."Whattowatch"can
changeovertime.Inrecentyears,forexample,moneysupply,employment,tradebalancefigures
andinflationnumbershavealltakenturnsinthespotlight.
Technicaltradingconsiderations:Asinothermarkets,theaccumulatedpricemovementsina
currencypairsuchasEUR/USDcanformapparentpatternsthattradersmayattempttouse.Many
tradersstudypricechartsinordertoidentifysuchpatterns.[79]

Financialinstruments
Spot
Aspottransactionisatwodaydeliverytransaction(exceptinthecaseoftradesbetweentheUSdollar,
Canadiandollar,Turkishlira,euroandRussianruble,whichsettlethenextbusinessday),asopposedto
thefuturescontracts,whichareusuallythreemonths.Thistraderepresentsadirectexchangebetween
twocurrencies,hastheshortesttimeframe,involvescashratherthanacontract,andinterestisnot
includedintheagreedupontransaction.SpottradingisoneofthemostcommontypesofForexTrading.
Often,aforexbrokerwillchargeasmallfeetotheclienttorollovertheexpiringtransactionintoanew
identicaltransactionforacontinuumofthetrade.Thisrolloverfeeisknownasthe"Swap"fee.

Forward
Onewaytodealwiththeforeignexchangeriskistoengageinaforwardtransaction.Inthistransaction,
moneydoesnotactuallychangehandsuntilsomeagreeduponfuturedate.Abuyerandselleragreeon
anexchangerateforanydateinthefuture,andthetransactionoccursonthatdate,regardlessofwhatthe
marketratesarethen.Thedurationofthetradecanbeoneday,afewdays,monthsoryears.Usuallythe
dateisdecidedbybothparties.Thentheforwardcontractisnegotiatedandagreeduponbybothparties.
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Swap
Themostcommontypeofforwardtransactionistheforeignexchangeswap.Inaswap,twoparties
exchangecurrenciesforacertainlengthoftimeandagreetoreversethetransactionatalaterdate.These
arenotstandardizedcontractsandarenottradedthroughanexchange.Adepositisoftenrequiredin
ordertoholdthepositionopenuntilthetransactioniscompleted.

Futures
Futuresarestandardizedforwardcontractsandareusuallytradedonanexchangecreatedforthis
purpose.Theaveragecontractlengthisroughly3months.Futurescontractsareusuallyinclusiveofany
interestamounts.
Currencyfuturescontractsarecontractsspecifyingastandardvolumeofaparticularcurrencytobe
exchangedonaspecificsettlementdate.Thusthecurrencyfuturescontractsaresimilartoforward
contractsintermsoftheirobligation,butdifferfromforwardcontractsinthewaytheyaretraded.They
arecommonlyusedbyMNCstohedgetheircurrencypositions.Inadditiontheyaretradedby
speculatorswhohopetocapitalizeontheirexpectationsofexchangeratemovements.

Option
Aforeignexchangeoption(commonlyshortenedtojustFXoption)isaderivativewheretheownerhas
therightbutnottheobligationtoexchangemoneydenominatedinonecurrencyintoanothercurrencyat
apreagreedexchangerateonaspecifieddate.TheFXoptionsmarketisthedeepest,largestandmost
liquidmarketforoptionsofanykindintheworld.

Speculation
Controversyaboutcurrencyspeculatorsandtheireffectoncurrencydevaluationsandnational
economiesrecursregularly.EconomistsincludingMiltonFriedmanhavearguedthatspeculators
ultimatelyareastabilizinginfluenceonthemarket,andthatstabilizingspeculationperformsthe
importantfunctionofprovidingamarketforhedgersandtransferringriskfromthosepeoplewhodon't
wishtobearit,tothosewhodo.[80]Othereconomists,suchasJosephStiglitz,considerthisargumentto
bebasedmoreonpoliticsandafreemarketphilosophythanoneconomics.[81]
Largehedgefundsandotherwellcapitalized"positiontraders"arethemainprofessionalspeculators.
Accordingtosomeeconomists,individualtraderscouldactas"noisetraders"andhaveamore
destabilizingrolethanlargerandbetterinformedactors.[82]Alsotobeconsideredistheriseinforeign
exchangeautotradingalgorithmic,orautomated,tradinghasincreasedfrom2%in2004upto45%in
2010.[83]
Currencyspeculationisconsideredahighlysuspectactivityinmanycountries.Whileinvestmentin
traditionalfinancialinstrumentslikebondsorstocksoftenisconsideredtocontributepositivelyto
economicgrowthbyprovidingcapital,currencyspeculationdoesnotaccordingtothisview,itissimply
gamblingthatofteninterfereswitheconomicpolicy.Forexample,in1992,currencyspeculationforced
theCentralBankofSwedentoraiseinterestratesforafewdaysto500%perannum,andlaterto
devaluethekrona.[84]MahathirMohamad,oneoftheformerPrimeMinistersofMalaysia,isonewell
knownproponentofthisview.HeblamedthedevaluationoftheMalaysianringgitin1997onGeorge
Sorosandotherspeculators.
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GregoryMillmanreportsonanopposingview,comparingspeculatorsto"vigilantes"whosimplyhelp
"enforce"internationalagreementsandanticipatetheeffectsofbasiceconomic"laws"inorderto
profit.[85]
Inthisview,countriesmaydevelopunsustainablefinancialbubblesorotherwisemishandletheir
nationaleconomies,andforeignexchangespeculatorsmadetheinevitablecollapsehappensooner.A
relativelyquickcollapsemightevenbepreferabletocontinuedeconomicmishandling,followedbyan
eventual,larger,collapse.MahathirMohamadandothercriticsofspeculationareviewedastryingto
deflecttheblamefromthemselvesforhavingcausedtheunsustainableeconomicconditions.

Riskaversion
Riskaversionisakindoftradingbehaviorexhibitedbytheforeign
exchangemarketwhenapotentiallyadverseeventhappenswhichmay
affectmarketconditions.Thisbehavioriscausedwhenriskaverse
tradersliquidatetheirpositionsinriskyassetsandshiftthefundstoless
riskyassetsduetouncertainty.[86]
Fig.1ChartshowingMSCI
Inthecontextoftheforeignexchangemarket,tradersliquidatetheir
WorldIndexofEquitiesfell
positionsinvariouscurrenciestotakeuppositionsinsafehaven
whiletheUSdollarIndex
currencies,suchastheUSdollar.[87]Sometimes,thechoiceofasafe
rose.
havencurrencyismoreofachoicebasedonprevailingsentiments
ratherthanoneofeconomicstatistics.Anexamplewouldbethe
FinancialCrisisof2008.ThevalueofequitiesacrosstheworldfellwhiletheUSdollarstrengthened
(seeFig.1).ThishappeneddespitethestrongfocusofthecrisisintheUSA.[88]

Carrytrade
Currencycarrytradereferstotheactofborrowingonecurrencythathasalowinterestrateinorderto
purchaseanotherwithahigherinterestrate.Alargedifferenceinratescanbehighlyprofitableforthe
trader,especiallyifhighleverageisused.However,withallleveredinvestmentsthisisadoubleedged
sword,andlargeexchangeratepricefluctuationscansuddenlyswingtradesintohugelosses.

Forexsignals
Forextradealerts,oftenreferredtoas"forexsignals",aretradestrategiesprovidedbyeitherexperienced
tradersormarketanalysts.Thesesignalswhichareoftenchargedapremiumfeeforcanthenbecopied
orreplicatedbyatradertohisownliveaccount.Forexsignalproductsarepackagedaseitheralerts
deliveredtoauser'sinboxorSMS,orcanbeinstalledtoatrader'stradingplatforms.Algorithmic
trading,wherebyforeignexchangeuserscanprogramme(orbuyreadymadesoftware)toplacetrades
ontheirbehalf,accordingtopredeterminedruleshasbecomeverypopularinrecentyears.Thismeans
thatuserscansettheir'Algos'totradeontheirbehalf,thusreducingtheneedtositandmonitorthe
marketscontinuously,plusitcanremovetheelementofhumanemotionaroundexecutingatrade.

Seealso
Balanceoftrade
Currencycodes
https://en.wikipedia.org/wiki/Foreign_exchange_market

Foreignexchangecontrols
Foreignexchangehedge

Moneymarket
Nonfarmpayrolls
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Currencystrength
Foreigncurrency
mortgage

Foreignexchangereserves
Foreignexchange
derivative

Tobintax
Worldcurrency

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