Chapter 1

National currenciesSpot rates, cross rates, and the arbitrage opportunitiesIntra-day activity

Central bank interventionTrading volume and major players

Poorna Pal, MS MBA Ph.D.

USD US dollarEUR EuroGBP British poundJPY Japanese yenAFN Afghanistan AfghaniALL Albanian Lek

The currencies and currency symbols

World currencies

Paper Currencies of the World

Currencies with their own special symbols: $ US Dollar€ Euro£ British Pound¥ Japanese Yen₹ Indian Rupee

The ISO codes of national currencies

ISO (International Standards Organization) maintains the 2-digits/3-digits codes for every country and its currency.

Euro (EUR) is the common currency of the following European countries:

Austria, Belgium, Cyprus, Finland, France, Germany, Greece, Ireland, Italy, Luxem-bourg, Malta, Netherlands, Portugal, Spain and Slovenia.

http://www.xe.com/symbols.php#list

Currencies of the world, by order of popularity

http://www.xe.com/currency/

Spot rates and spreadsSpot rates and spreads

Recent OANDA SpreadsSelect from the currency-pair list to see 7-day historical spread charts for any of the currency pairs available for trading at OANDA. Our prices are a true reflection of forex market pricing. We always publish tradable spreads—even when spreads widen due to market events or on weekends, when liquidity is scarce. Click the numbers in the charts to see market events that may have affected our spreads. OANDA also publishes real-time currency spreads and a comparison of spreads with other brokers.

Bid/offer spread (also known as bid/ask or buy/sell spread) for securities (such as stocks, futures contracts, options, or currency pairs) is the difference between the prices quoted (either by a single market maker or in a limit order book) for an immediate sale (ask) and an immediate purchase (bid). The size of the bid-offer spread in a security is a measure of the liquidity of the market and of the size of the transaction cost. Example: Currency spreadIf the current bid price for the EUR/USD currency pair is 1.5760 and the current ask price is 1.5763, this means that currently you can sell the EUR/USD at 1.5760 and buy at 1.5763. The difference between those prices is the spread. If the USD/JPY currency pair is currently trading at 101.89/92, that is another way of saying that the bid for the USD/JPY is 101.89 and the ask is 101.92. This means that currently, holders of USD can sell 1 USD for 101.89 JPY and investors who wish to buy dollars can do so at a cost of 101.92 JPY per 1 USD.

http://www.marketwatch.com/investing/currencies/tools

Cross ratesCross rates

http://www.marketwatch.com/investing/currencies/tools

Cross Rate Calculationby csbhatnagar 1,395 views

More on cross rates here

http://www.ritholtz.com/blog/2010/05/comparing-world-indices/

Comparing Major World Indexes(March 9, 2009 to May 25, 2010)

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The Forex Market Never Sleeps

$ Quantity

¥/$

Exc

hang

e R

ate

100

DemandSupply

Start with …• ¥100 = 1 $ exchange rate, and• demand and supply for $ as shown.

90

Suppose US demand for Japanese goods increases. More $ now become available, so driving the exchange rate to ¥90 = 1 $.

S1D1

As this appreciation of ¥ against $ hurts the Japanese sales, Bank of Japan can make ¥ cheaper by lowering Japanese interest rates or $ costlier by buying $, so restoring ¥100 = 1$ exchange rate.

Central Bank intervention can steady the exchange rate.

Global foreign exchange market turnover by instrument1

http://www.bis.org/publ/rpfx10.pdf

0

1

2

3

41

989

199

5

199

2

200

1

199

8

200

4

200

7

201

0

Spot transactions

Foreign exchange swaps

Options etc.

Forwards

Ave

rage

dai

ly t

urno

ver,

trill

ion

US$

at A

pril

2010

exc

hang

e ra

te

Source: Bank of International Settlements(http://www.bis.org/)

Global foreign exchange market turnover by instrument

0

1

2

3

41

989

199

5

199

2

200

1

199

8

200

4

200

7

201

0

Spot transactions

Foreign exchange swaps

Options etc.

Forwards

Ave

rage

dai

ly t

urno

ver,

trill

ion

US$

at A

pril

2010

exc

hang

e ra

te

Source: Bank of International Settlements (http://www.bis.org/)

Forex Trading Volume Minimizes SwingsOxford Analytica, 09.29.10, 06:00 AM EDT In most developed economies currency trading is such a huge market that no one player can cause a substantial move.

According to the Bank for Inter-national Settlements' April 2010

surveys:• the euro/dollar market is trading over $1 trillion per day, and the

overall market for dollar as a counterpart is worth $3.1 trillion/day. • yen intervention faces a market worth $750 billion per day; and • the Swiss National Bank is active in the Swiss franc today, while

acknowledging that it can have little sustained impact in a market worth $240 billion per day.

As the yen and Swiss franc show that even the "smaller" markets are too big to be influenced unilaterally. As neither Japanese nor Swiss efforts today would enjoy the support of a multilateral agreement to intervene, they are likely to have little more than brief effect on these currencies' values.

The Forex Market: A layman's guide to how it works, and why it does what it does

Black Market versus Parallel MarketThe distinction between the parallel and the black markets is drawn along several related lines: how much is being sold, who is buying and who is selling, and where the transaction is taking place.

The parallel market usually deals in large sums — many millions of dollars; it is often between businessmen and companies and, in the past, had bankers as its middle-men; and it takes place in offices and sometimes homes.

Black market transactions happen on the streets, in the flea markets, and in back-rooms; sometimes for small sums of money like 20 US Dollars; and the deals often take place between individuals.