1. Chapter Eleven
Foreign Exchange

2. The Market
The foreign exchange market is international, open 24 hours a day, adjusts prices constantly and deals in huge sums
‘Five’ always means 5 million, whether dollars, yen or sterling, and yards is a billion
According to the BIS Triennial Central Bank Survey of Foreign Exchange and Derivatives Market Activity (2010), daily turnover had reached $3.981 trillion – a huge increase even from 2004, when daily turnover stood at $1.9 trillion
London is by far the largest foreign exchange market, trading $1,854bn daily (36.7% market share), followed by New York ($904bn) (17.9% share) and Tokyo ($312bn) (6.2% share)

3. Buyers and Sellers Importers/exporters Tourists
Government spending, for example for troops abroad
Speculators
Banks and institutions

4. Top 10 Traders by % Share of Foreign Exchange Market
Rank Bank % share
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1 Deutsche
2 Barclays Capital
3 UBS
4 Citi
5 JP Morgan
6 HSBC
7 RBS
8 Credit Suisse
9 Goldman Sachs
10 Morgan Stanley
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Source: Euromoney, May, 2011

5. What Determines Exchange Rates?
Purchasing power parity
Inflation
Balance of payments
Sheer psychology of the market

6. Bretton Woods
In the postwar period up to the early 1970s, currencies did not fluctuate as they do today but operated on a fixed basis
The system was set up at a conference in Bretton Woods (New Hampshire, U.S.) in 1944
It set up:
A system of exchange rate stability
The International Monetary Fund
The World Bank

7. Foreign Exchange Risk For Corporates
Transaction risk
Translation risk
Economic risk

8. Foreign Exchange Risk Hedging
Forward rates
Options
Break forward
Participating forward
Cylinder or collar
Swaps

9. Foreign Exchange Dealing
The foreign exchange dealer is surrounded by computer terminals giving exchange rates quoted by banks all over the world
An exchange rate between two currencies, neither of them the dollar, is a cross-rate
Extensive use is made of brokers who may not wish to reveal their position to others
Getting paid is, naturally, crucially important. Doing the deal on the telephone is called ‘front office’. Getting paid, reconciling accounts and so on is ‘back office’

10. Central Bank Foreign Exchange Surveys: Daily Foreign Exchange Dealing in 2004 and 2010
Centre Amount Share Amount Share
$bn % $bn %
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UK , US
Switzerland
Japan
Singapore
Hong Kong
Australia
Germany
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Source: BIS, Triennial Central Bank Survey, 2010