Exchange market and exchange of
currencies, Mechanism and examples
Videos
The
foreign exchange or Forex market (short for Foreign Exchange), FX or Currency
Market, is a global and decentralized market in which currencies or currencies
are traded (purchase, sale, exchange). The market was created to facilitate the
monetary flow that derives from international trade. FOREX is the largest
financial market in the world, with an average daily transaction volume of five
billion US dollars (USD), more than all other stock markets on the planet
combined. According to the Bank for International Settlements, 6.6 billion per day
was negotiated in April 2019. Wall Street would take more than a month to reach
this level. This market is very independent of the real commercial operations;
Variations between the price of two currencies are not explained solely by
variations in trade flows.
There are
also downward variations, for reasons such as the decrease in the operations of
leveraged institutions and "fast money" operators, the lower appetite
for risk, which is offset by increased activity in currency derivatives, mainly
with coverage purposes.
The
structure of operations shows what is done: The 6.6 billion dollars contain: $
2 billion in spot transactions, $ 1 billion in forwards, $ 3.2 billion in
currency exchange swaps, $ 108 billion of swaps currencies, $ 294 billion in
options and other products.
The main
actors are the large international banks, which facilitate trade between a wide
range of sellers and buyers every day continuously, except on weekends.
Currencies are always traded in pairs, the absolute value of a currency is not
established in the market, but the relative value where the price is
established with another currency. One dollar or 1 US $ is valued with CAD,
CHF, JPY (Canadian dollar, Swiss francs or yen, for example)
The
foreign exchange market is peculiar for: The volume of transactions, the
extreme liquidity of the market, the large number and variety of market
participants, geographical dispersion, the time in which it operates - 24 hours
a day (except for the purposes week), and the variety of factors that generate
exchange rates such as growth expectations, GDP; inflation, deficits or
surpluses (it is not only the commercial movement). It is important to know
that, since it is not a centralized market, there is not a single quote for the
traded currencies, it depends on the different agents that participate in the
market.
The main
trading centers are the London, New York and Tokyo stock exchanges. The
business starts in Asia, then Europe, finally the American markets open. Thus,
access to markets is permanent, there is greater liquidity and ability to
respond quickly to relevant or critical economic or political events. The news
is published on scheduled dates, all investors have access at the same time,
but the big banks have the advantage of seeing the order book of their clients.
In a study for 2019, 38.3% of the transactions were exclusively between banks,
54.5% were between banks and another type of financial firm, 7.2% were made
between an intermediary and a non-financial company.
Among the
financial instruments in the currency market, derivatives predominate. Currency
spot transactions (Foreign Exchange Spot Trading), Currency term transactions
are known. Of all these instruments, we will talk in next micro lessons.
The
factors that affect the exchange rate are Economic (trade deficit, inflation,
interest rate differences, public deficit, unemployment, GDP, CPI, etc.);
Political (stability or political instability affect monetary policy, exchange
rate or economic fundamentals); Market psychology (rumors, chaotic behaviors,
etc.)
Negotiation Mechanism Examples
In the
currency market, currencies are traded at crosses, in pairs. Each coin crossing
is an individual product annotated as XXX / YYY, where YYY (against currency,
quote currrency or quote currency) is the international three-letter code ISO
4217 to express the price of a unit of XXX (the base) is express. There is also
the ISO 3166 standard that assigns a three-digit code to each country and a
three-digit code to each currency, but ISO 4217 is used more because it is much
more intuitive (USD, United States Dollar, JPY, Japan Yen) .
Example:
EUR / USD is the price of the Euro (EUR) expressed in US dollars (USD). The
most traded currency crosses are EUR / USD with 24.0%, USD / JPY, 13.2%, GBP /
USD, 9.6%. The USD dollar was involved in 88.3% of the transactions, followed
by the Euro (32.3%), yen (16.8%), and sterling (12.8%).
The
EURUSD (EUR / USD) 1.5465 is the price of the Euro expressed in US dollars,
which means 1 euro = 1.5465 dollars. The market convention is to quote the
majority of exchange rates with the USD taking the dollar as the monetary base
(USDJPY, USDCAD, USDCHF). The exceptions are the British pound (GBP),
Australian dollar (AUD), New Zealand dollar (NZD) and the euro (EUR) where the
USD is the counter currency (GBPUSD, AUDUSD, NZDUSD AND EURUSD). The factors
that affect XXX affect XXXYYY and XXXZZZ, which creates a positive correlation
between XXXYYY and XXXZZZ.
The
exchange rate, relationship between two currencies, is presented in thre
ways :
a)
Direct exchange rate, the most commonly used form in Europe, indicates the
amount of national currency needed to acquire a unit of foreign currency. In
countries where the base currency is the dollar: 1 USD = 0.81 EUR. It is shown
as USD / EUR 0.81.
b)
Indirect exchange rate, the amount of foreign currency received by each unit of
the national base currency is now reflected. The dollar is the quotation
currency, it is expressed as follows: 1 EUR = 1.23 USD, or EUR / USD 1.23.
c) Cross
types. The dollar is not a base or quotation currency, but appears in
intermediate calculations, EUR / GBP or GBP / JPY
Example 1: On August 24, 20xx the US dollar
is quoted in Frankfurt at 1.05 euros, in Zurich at 1.6 Swiss francs and in Tokyo
at 125 yen. Calculate:
a) The
price in euros of the Swiss franc and the yen.
b) The
quotation in Swiss francs of the euro and the yen
c) The
yen price of the Swiss franc and the euro
USD / EUR
= 1.05, USD / CHF = 1.6, USD / JPY = 125
a) CHF /
EUR = USD / EUR * 1 / (USD / CHF) = 1.05 / 1.6 = 0.65625
JPY
/ EUR = USD / EUR * 1 / (USD / JPY) = 1.05 / 125 = 0.0084
b) EUR /
CHF = USD / CHF * 1 / (USD / EUR) = 1.6 / 1.05 = 1.52389
JPY
/ CHF = USD / CHF * 1 / (USD / JPY) = 1.6 / 125 = 0.0128
c) CHF /
JPY = USD / JPY * 1 / (USD / CHF) = 125 / 1.6 = 78.125
EUR
/ JPY = USD / JPY * 1 / (USD / EUR) = 125 / 1.05 = 119.0746
Example 2. On February 25, 2020, the US
dollar USD is quoted at EUR 0.920692, CHF 0.978554, 110. 929 JPY yen.
Calculate:
a) The
price in euros of the Swiss franc and the yen.
b) The
quotation in Swiss francs of the euro and the yen
c) The
yen price of the Swiss franc and the euro
Solution:
a) 0.94081; 0.0083005 b) 1.06291; 0.00882275 c) 113.343; 120,481
Example 3. On February 20, 2020, the US
dollar traded at 3,40950 Peruvian PEN soles, EUR 0.919974, GBP GBP 0.769317.
Calculate:
a) The
price in euros of the Peruvian sun and the pound.
b) The
quotation in pounds of the Peruvian sun and euro.
c) If you
have 50,000 soles, how many USD, EUR and GBP can you buy?
Solution:
a) 0.269847; 1,1597 b) 0.836141; 0.225644 c) 14664.91; 13492.62; 11282.17
References
¿Qué es el
tipo de cambio? - Todo lo que necesitas saber para ahorrar
Mercado de
divisas https://es.wikipedia.org/wiki/Mercado_de_divisas
Foreign
exchange market https://en.wikipedia.org/wiki/Foreign_exchange_market
6.600
milliards de dollars échangés chaque jour, la démesure du marché des
devises, sep 30, 2019
