International Finance
International Finance ECON 5319
The Foreign Exchange Market
William J. Crowder Ph.D.
The Foreign Exchange Market Origins of the Market • International trade - No single currency is particularly efficient as a medium of exchange. • International investment - Foreign assets are an alternative store of value. They may also serve to offset certain financial risks. Some of their features may not be available domestically too. • Speculation - The aim is purely to earn higher returns.
Growth in the Global Foreign Exchange and Over-the-Counter Derivatives Markets
Currency Distribution of Global Traditional Foreign Exchange Market Activity Rank
% daily share (April 2010)
Currency
1
United States dollar
USD ($)
84.9%
2
Euro
EUR (€)
39.1%
3
Japanese yen
JPY (¥)
19.0%
4
Pound sterling
GBP (£)
12.9%
5
Australian dollar
AUD ($)
7.6%
6
Swiss franc
CHF (Fr)
6.4%
7
Canadian dollar
CAD ($)
5.3%
8
Hong Kong dollar
HKD ($)
2.4%
9
Swedish krona
SEK (kr)
2.2%
10
New Zealand dollar
NZD ($)
1.6%
Other Currencies
18.6% 200%
Currency Distribution of Global Traditional Foreign Exchange Market Activity
$4 Trillion Every Day
Global Foreign Exchange Market Turnover
Geographical Distribution of Global Traditional Foreign Exchange Market Activity
Foreign Exchange Market Products and Activities • A spot contract is a binding commitment for an exchange of funds, with normal settlement and delivery of bank balances following in two business days (one day in the case of North American currencies). • A forward contract, or outright forward, is an agreement made today for an obligatory exchange of funds at some specified time in the future (typically 1,2,3,6,12 months).
Foreign Exchange Market Products and Activities • Forward contracts typically involve a bank and a corporate counterparty and are used by corporations to manage their exposures to foreign exchange risk. • A foreign exchange swap is the simultaneous sale of a currency for spot delivery and purchase of that currency for forward delivery. • Foreign exchange swaps can be used by dealers to manage the maturity structure of their currency positions.
Foreign Exchange Market Products and Activities • Speculation entails more than the assumption of a risky position. It implies financial transactions undertaken when an individual’s expectations differ from the market’s expectation. • Arbitrage is the simultaneous, or nearly simultaneous, purchase of securities in one market for sale in another market with the expectation of a risk-free profit.
The Foreign Exchange Market Setting • The foreign exchange market is a dispersed, broker-dealer market, and hence lacks transparency. • Trading takes place 24 hours per day around the world, and the transactions can be customized. • Dealers can trade in a number of ways: – direct telephone contact with a dealer at another bank (direct dealing) – telephone contact with a voice broker – electronic direct trading and broking systems
Daily Trading Volumes by Hour
Daily Trading Volumes by Hour 25,000
20,000
15,000
10,000
5,000
0 1
2
3
4
5
6
10 AM Lunch Europe In Tokyo In Tokyo opens
7
8
9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24
Asia closing
Americas London open closing
Afternoon in America
6 pm Tokyo In NY opens
The Foreign Exchange Market Setting • A survey by the Euromoney magazine found that non-commercial banks have gained leading positions in the market. • There is also a trend toward increased concentration of business among fewer dealers.
Settlement and Settlement Risk
Settlement and Settlement Risk
Spot Exchange Rates
Spot Exchange Rates
Spot Rate Quotations • Direct quotation – the U.S. dollar equivalent – e.g. “a Japanese Yen is worth about a penny” • Indirect Quotation – the price of a U.S. dollar in the foreign currency – e.g. “you get 100 yen to the dollar”
Spot Rate Quotations Country
USD equiv Friday
USD equiv Thursday
Currency per USD Friday
Currency per USD Thursday
Argentina (Peso)
0.3309
0.3292
3.0221
3.0377
Australia (Dollar)
0.5906
0.5934
1.6932
1.6852
Brazil (Real)
0.2939
0.2879
3.4025
3.4734
Britain (Pound)
1.5627
1.5669
0.6399
0.6386
1 Month Forward
1.5596
1.5629
0.6412
0.6398
3 Months Forward
1.5535
1.5568
0.6437
0.6423
6 Months Forward
1.5445
1.5477
0.6475
0.6461
Canada (Dollar)
0.6692
0.6751
1.4943
1.4813
1 Month Forward
0.6681
0.6741
1.4968
1.4835
3 Months Forward
0.6658
0.6717
1.502
1.4888
6 Months Forward
0.662
0.6678
1.5106
1.4975
The direct quote for British pound is: £1 = $1.5627
Spot Rate Quotations Country
USD equiv Friday
USD equiv Thursday
Currency per USD Friday
Currency per USD Thursday
Argentina (Peso)
0.3309
0.3292
3.0221
3.0377
Australia (Dollar)
0.5906
0.5934
1.6932
1.6852
Brazil (Real)
0.2939
0.2879
3.4025
3.4734
Britain (Pound)
1.5627
1.566
0.6399
0.6386
1 Month Forward
1.5596
1.5629
0.6412
0.6398
3 Months Forward
1.5535
1.5568
0.6437
0.6423
6 Months Forward
1.5445
1.5477
0.6475
0.6461
Canada (Dollar)
0.6692
0.6751
1.4943
1.4813
1 Month Forward
0.6681
0.6741
1.4968
1.4835
3 Months Forward
0.6658
0.6717
1.502
1.4888
6 Months Forward
0.662
0.6678
1.5106
1.4975
The indirect quote for British pound is: £0.6399 = $1
Spot Rate Quotations
Country
USD equiv Friday
USD equiv Thursday
Currency per USD Friday
Currency per USD Thursday
Argentina (Peso)
0.3309
0.3292
3.0221
3.0377
Australia (Dollar)
0.5906
0.5934
1.6932
1.6852
Brazil (Real)
0.2939
0.2879
3.4025
3.4734
Britain (Pound)
1.5627
1.566
0.6399
0.6386
1 Month Forward
1.5596
1.5629
0.6412
0.6398
3 Months Forward
1.5535
1.5568
0.6437
0.6423
6 Months Forward
1.5445
1.5477
0.6475
0.6461
Canada (Dollar)
0.6692
0.6751
1.4943
1.4813
1 Month Forward
0.6681
0.6741
1.4968
1.4835
3 Months Forward
0.6658
0.6717
1.502
1.4888
6 Months Forward
0.662
0.6678
1.5106
1.4975
Note that the direct quote is the reciprocal of the indirect quote: 1.5627 =
1 0.6399
The Bid-Ask Spread • The bid price is the price a dealer is willing to pay you for something. • The ask price is the amount the dealer wants you to pay for the thing. • The bid-ask spread is the difference between the bid and ask prices.
Cross Rates • Suppose that S($/€) = .50 – i.e. $1 = 2 € • and that S(¥/€) = 50 – i.e. €1 = ¥50 • What must the $/¥ cross rate be?
$ $ € since = × , ¥ € ¥
$1 €1 $1 × = ⇒ S ($ / ¥) = .01 or $1 = ¥100 €2 ¥50 ¥100
Triangular Arbitrage Suppose we observe these banks posting these exchange rates.
$ Barclays
Credit Lyonnais
S(¥/$)=120
S(£/$)=1.50
First calculate the implied cross rates to see if an arbitrage exists.
¥
Credit Agricole S(¥/£)=85
£
Triangular Arbitrage The implied S(¥/£) cross rate is S(¥/£) = 80 Barclays
£1.50 $1 £1 × = $1 ¥120 ¥80 Credit Agricole has posted a quote of S(¥/£)=85 so there is an arbitrage opportunity.
$ Credit Lyonnais
S(¥/$)=120
¥
S(£/$)=1.50
Credit Agricole S(¥/£)=85
So, how can we make money? Buy the £ @ ¥80; sell @ ¥85. Then trade yen for dollars.
£
Triangular Arbitrage As easy as 1 – 2 – 3:
$ 1. Sell $ for £,
Barclays
2. Sell £ for ¥,
S(¥/$)=120
3
3. Sell ¥ for $.
Credit Lyonnais
1
S(£/$)=1.50
2
¥
Credit Agricole S(¥/£)=85
£
Triangular Arbitrage Sell $100,000 for £ at S(£/$) = 1.50 receive £150,000 Sell our £ 150,000 for ¥ at S(¥/£) = 85 receive ¥12,750,000 Sell ¥ 12,750,000 for $ at S(¥/$) = 120 receive $106,250 profit per round trip = $ 106,250- $100,000 = $6,250
The Forward Market • A forward contract is an agreement to buy or sell an asset in the future at prices agreed upon today. • If you have ever had to order an out-ofstock textbook, then you have entered into a forward contract.
Forward Rate Quotations • The forward market for FOREX involves agreements to buy and sell foreign currencies in the future at prices agreed upon today. • Bank quotes for 1, 3, 6, 9, and 12 month maturities are readily available for forward contracts. • Longer-term swaps are available.
Forward Rate Quotations • Consider the example from above: for British pound, the spot rate is $1.5627 = £1.00 While the 180-day forward rate is $1.5445 = £1.00 • What’s up with that?
Forward Rate Quotations Country
USD equiv Friday
USD equiv Thursday
Currency per USD Friday
Currency per USD Thursday
Argentina (Peso)
0.3309
0.3292
3.0221
3.0377
Australia (Dollar)
0.5906
0.5934
1.6932
1.6852
Brazil (Real)
0.2939
0.2879
3.4025
3.4734
Britain (Pound)
1.5627
1.566
0.6399
0.6386
1 Month Forward
1.5596
1.5629
0.6412
0.6398
3 Months Forward
1.5535
1.5568
0.6437
0.6423
6 Months Forward
1.5445
1.5477
0.6475
0.6461
Canada (Dollar)
0.6692
0.6751
1.4943
1.4813
1 Month Forward
0.6681
0.6741
1.4968
1.4835
3 Months Forward
0.6658
0.6717
1.502
1.4888
6 Months Forward
0.662
0.6678
1.5106
1.4975
Clearly the market participants expect that the pound will be worth less in dollars in six months.
Long and Short Forward Positions • If you have agreed to sell anything (spot or forward), you are “short”. • If you have agreed to buy anything (forward or spot), you are “long”. • If you have agreed to sell forex forward, you are short. • If you have agreed to buy forex forward, you are long.
Payoff Profiles profit
If you agree to sell anything in the future at a set price and the spot price later falls then you gain. F180($/¥) = 0.009524
0
loss
S180($/¥)
If you agree to sell anything in the future at a set price and the spot price later rises then you lose.
Short position
Payoff Profiles short position
profit
0 F180(¥/$) = 105
loss
Whether the payoff S180(¥/$) profile slopes up or down depends upon whether you use the direct or indirect quote: F180(¥/$) = 105 or F180($/¥) = .009524.
Payoff Profiles profit
short position
0 F180(¥/$) = 105 loss
S180(¥/$)
When the short entered into this forward contract, he agreed to sell ¥ in 180 days at F180(¥/$) = 105
Payoff Profiles profit
short position
15¥
S180(¥/$)
0 F180(¥/$) = 105
loss
120
If, in 180 days, S180(¥/$) = 120, the short will make a profit by buying ¥ at S180(¥/$) = 120 and delivering ¥ at F180(¥/$) = 105.
Payoff Profiles profit short position
F180(¥/$)
S180(¥/$)
0 F180(¥/$) = 105 -F180(¥/$) loss Since this is a zero-sum game, the long position payoff is the opposite of the short.
Long position
Payoff Profiles profit
The long in this forward contract agreed to BUY ¥ in 180 days at F180(¥/$) = 105
F180(¥/$) = 105 0 120
S180(¥/$)
–15¥
loss
Long position If, in 180 days, S180(¥/$) = 120, the long will lose by having to buy ¥ at S180(¥/$) = 120 and delivering ¥ at F180(¥/$) = 105.
Forward Premium • • •
The percentage difference (annualized) between the current forward rate and spot rate is the forward premium (if positive) or discount (if negative). For example, suppose the € is appreciating from S($/€) = 0.5235 to F180($/€) = 0.5307 The forward premium is given by:
F180 ($ / €) − S ($ / €) 360 .5307 − .5235 × = = .01375 FP180,€ / $ = 180 .5235 S ($ / €) •
We may approximate this using natural logarithms as:
fpn ,€ / $
⎡ Fn ($ / €) ⎤ 360 360 = ln ⎢ × = ( f n ,t − st ) × ⎥ n ⎣ S ($ / €) ⎦ n
Some FX Market Facts • Various studies indicate that: – The position of an interbank spot trader usually returns close to zero at the end of each day. – The majority of the profits of a bank’s spot trader were earned through trades with the bank’s retail customers rather than through interbank dealing or speculation. – The bid-ask spread tends to be wider at the start and at the end of the trading day.
The Foreign Exchange Market
William J. Crowder Ph.D.
The Foreign Exchange Market Origins of the Market • International trade - No single currency is particularly efficient as a medium of exchange. • International investment - Foreign assets are an alternative store of value. They may also serve to offset certain financial risks. Some of their features may not be available domestically too. • Speculation - The aim is purely to earn higher returns.
Growth in the Global Foreign Exchange and Over-the-Counter Derivatives Markets
Currency Distribution of Global Traditional Foreign Exchange Market Activity Rank
% daily share (April 2010)
Currency
1
United States dollar
USD ($)
84.9%
2
Euro
EUR (€)
39.1%
3
Japanese yen
JPY (¥)
19.0%
4
Pound sterling
GBP (£)
12.9%
5
Australian dollar
AUD ($)
7.6%
6
Swiss franc
CHF (Fr)
6.4%
7
Canadian dollar
CAD ($)
5.3%
8
Hong Kong dollar
HKD ($)
2.4%
9
Swedish krona
SEK (kr)
2.2%
10
New Zealand dollar
NZD ($)
1.6%
Other Currencies
18.6% 200%
Currency Distribution of Global Traditional Foreign Exchange Market Activity
$4 Trillion Every Day
Global Foreign Exchange Market Turnover
Geographical Distribution of Global Traditional Foreign Exchange Market Activity
Foreign Exchange Market Products and Activities • A spot contract is a binding commitment for an exchange of funds, with normal settlement and delivery of bank balances following in two business days (one day in the case of North American currencies). • A forward contract, or outright forward, is an agreement made today for an obligatory exchange of funds at some specified time in the future (typically 1,2,3,6,12 months).
Foreign Exchange Market Products and Activities • Forward contracts typically involve a bank and a corporate counterparty and are used by corporations to manage their exposures to foreign exchange risk. • A foreign exchange swap is the simultaneous sale of a currency for spot delivery and purchase of that currency for forward delivery. • Foreign exchange swaps can be used by dealers to manage the maturity structure of their currency positions.
Foreign Exchange Market Products and Activities • Speculation entails more than the assumption of a risky position. It implies financial transactions undertaken when an individual’s expectations differ from the market’s expectation. • Arbitrage is the simultaneous, or nearly simultaneous, purchase of securities in one market for sale in another market with the expectation of a risk-free profit.
The Foreign Exchange Market Setting • The foreign exchange market is a dispersed, broker-dealer market, and hence lacks transparency. • Trading takes place 24 hours per day around the world, and the transactions can be customized. • Dealers can trade in a number of ways: – direct telephone contact with a dealer at another bank (direct dealing) – telephone contact with a voice broker – electronic direct trading and broking systems
Daily Trading Volumes by Hour
Daily Trading Volumes by Hour 25,000
20,000
15,000
10,000
5,000
0 1
2
3
4
5
6
10 AM Lunch Europe In Tokyo In Tokyo opens
7
8
9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24
Asia closing
Americas London open closing
Afternoon in America
6 pm Tokyo In NY opens
The Foreign Exchange Market Setting • A survey by the Euromoney magazine found that non-commercial banks have gained leading positions in the market. • There is also a trend toward increased concentration of business among fewer dealers.
Settlement and Settlement Risk
Settlement and Settlement Risk
Spot Exchange Rates
Spot Exchange Rates
Spot Rate Quotations • Direct quotation – the U.S. dollar equivalent – e.g. “a Japanese Yen is worth about a penny” • Indirect Quotation – the price of a U.S. dollar in the foreign currency – e.g. “you get 100 yen to the dollar”
Spot Rate Quotations Country
USD equiv Friday
USD equiv Thursday
Currency per USD Friday
Currency per USD Thursday
Argentina (Peso)
0.3309
0.3292
3.0221
3.0377
Australia (Dollar)
0.5906
0.5934
1.6932
1.6852
Brazil (Real)
0.2939
0.2879
3.4025
3.4734
Britain (Pound)
1.5627
1.5669
0.6399
0.6386
1 Month Forward
1.5596
1.5629
0.6412
0.6398
3 Months Forward
1.5535
1.5568
0.6437
0.6423
6 Months Forward
1.5445
1.5477
0.6475
0.6461
Canada (Dollar)
0.6692
0.6751
1.4943
1.4813
1 Month Forward
0.6681
0.6741
1.4968
1.4835
3 Months Forward
0.6658
0.6717
1.502
1.4888
6 Months Forward
0.662
0.6678
1.5106
1.4975
The direct quote for British pound is: £1 = $1.5627
Spot Rate Quotations Country
USD equiv Friday
USD equiv Thursday
Currency per USD Friday
Currency per USD Thursday
Argentina (Peso)
0.3309
0.3292
3.0221
3.0377
Australia (Dollar)
0.5906
0.5934
1.6932
1.6852
Brazil (Real)
0.2939
0.2879
3.4025
3.4734
Britain (Pound)
1.5627
1.566
0.6399
0.6386
1 Month Forward
1.5596
1.5629
0.6412
0.6398
3 Months Forward
1.5535
1.5568
0.6437
0.6423
6 Months Forward
1.5445
1.5477
0.6475
0.6461
Canada (Dollar)
0.6692
0.6751
1.4943
1.4813
1 Month Forward
0.6681
0.6741
1.4968
1.4835
3 Months Forward
0.6658
0.6717
1.502
1.4888
6 Months Forward
0.662
0.6678
1.5106
1.4975
The indirect quote for British pound is: £0.6399 = $1
Spot Rate Quotations
Country
USD equiv Friday
USD equiv Thursday
Currency per USD Friday
Currency per USD Thursday
Argentina (Peso)
0.3309
0.3292
3.0221
3.0377
Australia (Dollar)
0.5906
0.5934
1.6932
1.6852
Brazil (Real)
0.2939
0.2879
3.4025
3.4734
Britain (Pound)
1.5627
1.566
0.6399
0.6386
1 Month Forward
1.5596
1.5629
0.6412
0.6398
3 Months Forward
1.5535
1.5568
0.6437
0.6423
6 Months Forward
1.5445
1.5477
0.6475
0.6461
Canada (Dollar)
0.6692
0.6751
1.4943
1.4813
1 Month Forward
0.6681
0.6741
1.4968
1.4835
3 Months Forward
0.6658
0.6717
1.502
1.4888
6 Months Forward
0.662
0.6678
1.5106
1.4975
Note that the direct quote is the reciprocal of the indirect quote: 1.5627 =
1 0.6399
The Bid-Ask Spread • The bid price is the price a dealer is willing to pay you for something. • The ask price is the amount the dealer wants you to pay for the thing. • The bid-ask spread is the difference between the bid and ask prices.
Cross Rates • Suppose that S($/€) = .50 – i.e. $1 = 2 € • and that S(¥/€) = 50 – i.e. €1 = ¥50 • What must the $/¥ cross rate be?
$ $ € since = × , ¥ € ¥
$1 €1 $1 × = ⇒ S ($ / ¥) = .01 or $1 = ¥100 €2 ¥50 ¥100
Triangular Arbitrage Suppose we observe these banks posting these exchange rates.
$ Barclays
Credit Lyonnais
S(¥/$)=120
S(£/$)=1.50
First calculate the implied cross rates to see if an arbitrage exists.
¥
Credit Agricole S(¥/£)=85
£
Triangular Arbitrage The implied S(¥/£) cross rate is S(¥/£) = 80 Barclays
£1.50 $1 £1 × = $1 ¥120 ¥80 Credit Agricole has posted a quote of S(¥/£)=85 so there is an arbitrage opportunity.
$ Credit Lyonnais
S(¥/$)=120
¥
S(£/$)=1.50
Credit Agricole S(¥/£)=85
So, how can we make money? Buy the £ @ ¥80; sell @ ¥85. Then trade yen for dollars.
£
Triangular Arbitrage As easy as 1 – 2 – 3:
$ 1. Sell $ for £,
Barclays
2. Sell £ for ¥,
S(¥/$)=120
3
3. Sell ¥ for $.
Credit Lyonnais
1
S(£/$)=1.50
2
¥
Credit Agricole S(¥/£)=85
£
Triangular Arbitrage Sell $100,000 for £ at S(£/$) = 1.50 receive £150,000 Sell our £ 150,000 for ¥ at S(¥/£) = 85 receive ¥12,750,000 Sell ¥ 12,750,000 for $ at S(¥/$) = 120 receive $106,250 profit per round trip = $ 106,250- $100,000 = $6,250
The Forward Market • A forward contract is an agreement to buy or sell an asset in the future at prices agreed upon today. • If you have ever had to order an out-ofstock textbook, then you have entered into a forward contract.
Forward Rate Quotations • The forward market for FOREX involves agreements to buy and sell foreign currencies in the future at prices agreed upon today. • Bank quotes for 1, 3, 6, 9, and 12 month maturities are readily available for forward contracts. • Longer-term swaps are available.
Forward Rate Quotations • Consider the example from above: for British pound, the spot rate is $1.5627 = £1.00 While the 180-day forward rate is $1.5445 = £1.00 • What’s up with that?
Forward Rate Quotations Country
USD equiv Friday
USD equiv Thursday
Currency per USD Friday
Currency per USD Thursday
Argentina (Peso)
0.3309
0.3292
3.0221
3.0377
Australia (Dollar)
0.5906
0.5934
1.6932
1.6852
Brazil (Real)
0.2939
0.2879
3.4025
3.4734
Britain (Pound)
1.5627
1.566
0.6399
0.6386
1 Month Forward
1.5596
1.5629
0.6412
0.6398
3 Months Forward
1.5535
1.5568
0.6437
0.6423
6 Months Forward
1.5445
1.5477
0.6475
0.6461
Canada (Dollar)
0.6692
0.6751
1.4943
1.4813
1 Month Forward
0.6681
0.6741
1.4968
1.4835
3 Months Forward
0.6658
0.6717
1.502
1.4888
6 Months Forward
0.662
0.6678
1.5106
1.4975
Clearly the market participants expect that the pound will be worth less in dollars in six months.
Long and Short Forward Positions • If you have agreed to sell anything (spot or forward), you are “short”. • If you have agreed to buy anything (forward or spot), you are “long”. • If you have agreed to sell forex forward, you are short. • If you have agreed to buy forex forward, you are long.
Payoff Profiles profit
If you agree to sell anything in the future at a set price and the spot price later falls then you gain. F180($/¥) = 0.009524
0
loss
S180($/¥)
If you agree to sell anything in the future at a set price and the spot price later rises then you lose.
Short position
Payoff Profiles short position
profit
0 F180(¥/$) = 105
loss
Whether the payoff S180(¥/$) profile slopes up or down depends upon whether you use the direct or indirect quote: F180(¥/$) = 105 or F180($/¥) = .009524.
Payoff Profiles profit
short position
0 F180(¥/$) = 105 loss
S180(¥/$)
When the short entered into this forward contract, he agreed to sell ¥ in 180 days at F180(¥/$) = 105
Payoff Profiles profit
short position
15¥
S180(¥/$)
0 F180(¥/$) = 105
loss
120
If, in 180 days, S180(¥/$) = 120, the short will make a profit by buying ¥ at S180(¥/$) = 120 and delivering ¥ at F180(¥/$) = 105.
Payoff Profiles profit short position
F180(¥/$)
S180(¥/$)
0 F180(¥/$) = 105 -F180(¥/$) loss Since this is a zero-sum game, the long position payoff is the opposite of the short.
Long position
Payoff Profiles profit
The long in this forward contract agreed to BUY ¥ in 180 days at F180(¥/$) = 105
F180(¥/$) = 105 0 120
S180(¥/$)
–15¥
loss
Long position If, in 180 days, S180(¥/$) = 120, the long will lose by having to buy ¥ at S180(¥/$) = 120 and delivering ¥ at F180(¥/$) = 105.
Forward Premium • • •
The percentage difference (annualized) between the current forward rate and spot rate is the forward premium (if positive) or discount (if negative). For example, suppose the € is appreciating from S($/€) = 0.5235 to F180($/€) = 0.5307 The forward premium is given by:
F180 ($ / €) − S ($ / €) 360 .5307 − .5235 × = = .01375 FP180,€ / $ = 180 .5235 S ($ / €) •
We may approximate this using natural logarithms as:
fpn ,€ / $
⎡ Fn ($ / €) ⎤ 360 360 = ln ⎢ × = ( f n ,t − st ) × ⎥ n ⎣ S ($ / €) ⎦ n
Some FX Market Facts • Various studies indicate that: – The position of an interbank spot trader usually returns close to zero at the end of each day. – The majority of the profits of a bank’s spot trader were earned through trades with the bank’s retail customers rather than through interbank dealing or speculation. – The bid-ask spread tends to be wider at the start and at the end of the trading day.
