Економічні науки/2. Зовнішньоекономічна діяльність

Тахтарова Ю.О., Шеремет Т.Г.

Донецький національній університет економіки і торгівлі

імені Михайла Туган-Барановського

Foreign exchange market as one of the world financial markets

Foreign exchange is the act of trading different nation’s moneys. The greater part of the money assets traded in foreign exchange markets are demand deposits in banks. A very small part consists of coins and currency of the ordinary pocket variety.

Foreign exchange transactions typically involve one party purchasing a quantity of one currency in exchange for paying a quantity of anothers. The foreign exchange market is one of the largest and most liquid financial markets in the world, and includes trading between large banks, central banks, currency speculators, corporations, governments, and other institutions.

The purpose for such a market is to facilitate trade and investments. The need for a foreign exchange market arises because of the presence of multifarious international currencies such as US Dollars, Pound Sterling, etc, and the need for trading in such currencies.

The foreign exchange market is unique because of:

- its trading volumes;

- the extreme liquidity of the market;

- its geographical dispersion;

- its long trading hours: 24 hours a day except on weekends (from 22:00 UTC on Sunday until 22:00 UTC Friday);

- the variety of factors that affect exchange rates;

- the low margins of profit compared with other markets of fixed income (but profits can be high due to very large trading volumes);

- the use of leverage.

An exchange rate is the price of one nation’s money in terms of another nation’s money. There are two basic types of exchange rate, depending on the timing of the actual exchange of moneys. the spot exchange rate is the price for ‘immediate’ exchange. For standard large trades in the market, immediate exchange for most currencies means exchange or delivery in two working days after the exchange is agreed, while it means one working day after the exchange is agreed for exchanges between U.S. dollars, Canadian dollars, and Mexican pesos.

The forward exchange rate is the price set now for an exchange that will take place sometime in future. Forward exchange rates are prices that are agreed today for exchanges of moneys that will occur at a specified time in the future, such as 30, 90, or 180 days from now.

The foreign exchange market is not a single gathering place where traders shout buy and sell orders at each other. Rather, banks and the traders who work at banks are the center of the foreign exchange market. These banks and their traders use computers and telephones to conduct foreign exchange trades with their customers and also with each other.

The trading done with customers is called the retail part of the market. Some of this is trading with individuals in small amounts. Most of the retail part of the market involves nonofficial companies, and other organizations that undertake large trades as the customers of the banks that actively deal in the market. The trading done between the banks active in the market is called the interbank part of the market.

The banks active in foreign exchange trading are located in different countries around the world, so this is a 24-hour market. Main foreign exchange market turnover is presented on the figure 1.

Figure 1 Main foreign exchange market turnover, 1988-2007, billions of USD

According to the figure 1 we can make a suggestion about constant growth of foreign exchange market turnover during the examined period.

On working days, foreign exchange trading is always occurring somewhere in the world. Although banks throughout the world participate, half of foreign exchange trading involves banks in two locations: London and New York.

Fluctuations in exchange rates are usually caused by actual monetary flows as well as by expectations of changes in monetary flows caused by changes in gross domestic product (GDP) growth, inflation (purchasing power parity theory), interest rates (interest rate parity, Domestic Fisher effect, International Fisher effect), budget and trade deficits or surpluses, large cross-border M&A deals and other macroeconomic conditions. Major news is released publicly, often on scheduled dates, so many people have access to the same news at the same time. However, the large banks have an important advantage; they can see their customers' order flow.

To sum up, it is important to mention that foreign exchange market is where currency trading takes place. Foreign exchange transactions typically involve one party purchasing a quantity of one currency in exchange for paying a quantity of another. This market includes trading between large banks, central banks, currency speculators, corporations, governments, and other institutions. The average daily volume in the global foreign exchange and related markets is continuously growing.