Foreign Exchange Markets

The market in foreign exchange is an excellent example of a liquid, transparent and immediate global financial market. Rates in the foreign exchange (FX) markets move at an extremely rapid pace and in fact, trading in FX is a different discipline to bond trading or money markets trading. There is a considerable literature on the FX markets, as it is a separate subject in its own right. However some banks organise their forward FX desk as part of the money market desk and not the foreign exchange desk, necessitating its inclusion in this book. For this reason we present an overview summary of FX in this chapter, both spot and forward.

The quotation for currencies generally follows the ISO convention, which is also used by the SWIFT and Reuters dealing systems, and is the three-letter code used to identify a currency, such as USD for US dollar and GBP for sterling. The rate convention is to quote everything in terms of one unit of the US dollar, so that the dollar and Swiss franc rate is quoted as USD/CHF, and is the number of Swiss francs to one US dollar. The exception is for sterling, which is quoted as GBP/USD and is the number of US dollars to the pound. This rate is also known as “cable”. The rate for euros has been quoted both ways round, for example EUR/USD although some banks, for example Royal Bank of Scotland in the UK, quote euros to the pound, that is GBP/EUR.

The complete list of currency codes was given at Appendix 1.2.

Spot exchange ...

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