Chapter 5

A direct quote from the U.S. perspective.

In the context of a domestic currency, a decrease (increase) in a foreign exchange rate relative to another currency when stated in terms of the domestic (foreign) currency.

The price at which dealers will buy a financial asset.

An interbank market made up of a network with large commercial banks maintaining demand deposit accounts with one another. These accounts facilitates the efficient functioning of the FX market.

-SWIFT (Society for Worldwide Interbank Financial Telecommunications)
-CHIPS (Clearing House Interbank Payments System)
-ECHO (Exchange Clearing House Limited) (This is the first global clearinghouse for settling interbank FX transactions)

An exchange rate between a currency pair where neither currency is the U.S. dollar.

This trade is when a customer wants to trade out a nondollar currency for another nondollar currency. This is handled at the cross-rate desk of the bank.

In the context of a domestic currency, an increase (decrease) in a foreign exchange rate relative to another currency when stated in terms of the domestic (foreign) currency.

Refer to the price of one unit of a foreign currency in terms of the domestic currency.

Forward quotations are the reciprocal of the American term quotes.

The portfolios of securities that are traded on the stock exchanges like individual securities.

Encompass the conversion of purchasing power from one currency into another, bank deposits of foreign currencies, and trading in foreign currency spot, forward, futures, swap, and options contracts.

A market for trading foreign exchange contract initiated today but to be settled at a future date.

The amount overnder the spot exchange rate for a forward rate that is ofen expressed as an annualized percent deviation from the spot rate.

F notation is used to denote a forward exchange rate. Forward quotes are either direct or indirect with one being the reciprocal of the other.

This is the price of one domestic currency in terms of a foreign currency.

-About 100-200 banks worldwide stand ready to "make a market" in foreign exchange
-Nonbank dealers account for about 40% of the market
-There are FX brokers who match buy and sell orders but do not carry inventory and FX specialists
-Standard size trade is about $10 million

The price at which a dealer will sell a financial asset. Also known as ask price.

Trading market in which there is no central marketplace; instead, buyers and sellers are linked via a network of telephones, telex machines, computers, and automated dealing systems.

Market participants include international banks, their customers, nonbank dealers, FX brokers, and central banks.

Price at which foreign exchange can be sold or purchased for immediate (within two business days) delivery. One can buy (take a long position) or sell (take a short position) foreign exchange.

The simultaneous spot sale (purchase) of an asset against a forward purchase (sale) of an approximately equal amount of the asset.

The process of trading U.S. dollars for a second currency and subsequently trading this for a third currency. This third currency is then traded for U.S. dollars. The purpose of such trading is to earn arbitrage profit via trading from the second currency to the third.