FX Market Organisation
The FX market is the sum of following markets: spot , forward and swap markets.
In the spot market, currencies are traded for immediate delivery: within 2 days after the transaction has been concluded.
In the forward market contracts are closed to buy or to sell currencies for forward delivery.
The swap market is the sum of swap transactions that involve a package of a spot and a forward currency contract.
Spot transactions account for about 33% of the market volumes, forward transactions account for another 12% and the remaining 55% consists of swap trades.
Source: Bank for International Settlements, December’07.
FX Futures Market
As an alternative to the FX forward market, there is the FX futures market and the main FX futures exchange is the Chicago Mercantile Exchange (CME) located in United States.
Futures contracts are standardized contracts that trade on organized markets for specific delivery dates only.
In the case of the CME, the most actively traded currency futures contracts are for March, June, September and December delivery.
Contracts expire 2 business days before the third Wednesday of the delivery month.
Contract size and maturity are standardized and the FX trades are settled by the exchange clearing house.
Exchange clearing house is:
- Backed by its members’ capital(via initial margins and margin calls eventually)
- The legal counterparty to both the buyer and the seller of the futures contracts
- The guarantor of no counterparty risk at contract delivery
Currency futures contracts are currently available for Australian dollar, Brazilian real, British pound, Canadian dollar, Chinese renmbinbi, Swiss franc, European euro and so on.
The CME added a number of cross rates contracts and by taking the US dollar out of the equation, cross rates futures allow the market participant to hedge directly the currency risk that arises from dealing with non-dollar currencies.
FX Market Dimension
FX market is by far the largest financial market in the world.
According to the Bank for international Settlements ‘survey conducted in 2007, worldwide FX trading volume is around $3.2 trillion daily, or $800 trillion a year.
Considering that US gross domestic product (gdp) was $14 trillion in 2007, yearly worldwide FX volume was 51 times greater that US gdp.
FX market organization
The FX market is an electronically linked network of market participants.
Underlying currency transactions are done over - the - counter (otc), which means that transactions are not closed in a formalized exchange (such as LSE, CME or NYSE).
Currency trading takes place 24 hours a day for 5.5 days a week.
The FX market is not confined to any one country but it is dispersed trough the main financial centres in the world: London, New York, Frankfurt, Milan, Tokyo and Toronto.
The major players in the spot foreign exchange market are:
- Large commercial banks
- FX brokers and dealers
- Commercial customers (such as multinational corporations)
- Central Banks
The major players in the forward market can be categorized as: