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Encyclopedia > Foreign Exchange Market
Foreign exchange

Exchange rates
Currency band
Exchange rate
Exchange rate regime
Fixed exchange rate
Floating exchange rate
Linked exchange rate
In finance, the exchange rate (also known as the foreign-exchange rate, forex rate or FX rate) between two currencies specifies how much one currency is worth in terms of the other. ... Image File history File links Forex. ... The currency band is a system of exchange rates by which a floating currency is backed by hard money. ... The exchange rate regime is the way a country manages its currency in respect to foreign currencies and the foreign exchange market. ... A fixed exchange rate, sometimes (less commonly) called a pegged exchange rate, is a type of exchange rate regime wherein a currencys value is matched to the value of another single currency or to a basket of other currencies, or to another measure of value, such as gold. ... A floating exchange rate or a flexible exchange rate is a type of exchange rate regime wherein a currencys value is allowed to fluctuate according to the foreign exchange market. ... A linked exchange rate system is a type of exchange rate regime to link the exchange rate of a currency to another. ...

Markets
Foreign exchange market
Futures exchange
Retail forex
The introduction to this article provides insufficient context for those unfamiliar with the subject matter. ... In financial markets, the retail forex (retail currency trading or retail FX) market is a subset of the larger foreign exchange market. ...

Products
Currency
Currency future
Non-deliverable forward
Forex swap
Currency swap
Foreign exchange option
A currency future, also FX future or foreign exchange future, is a futures contract to exchange one currency for another at a specified date in the future at a price (exchange rate) that is fixed on the last trading date. ... This article is about the financial instrument. ... Forex swap is an over the counter short term interest rate derivative instrument. ... A currency swap is a foreign exchange agreement between two parties to exchange a given amount of one currency for another and, after a specified period of time, to give back the original amounts swapped. ... In finance, a foreign exchange option (commonly shortened to just FX option or currency option) is a derivative financial instrument where the owner has the right but not the obligation to exchange money denominated in one currency into another currency at a pre-agreed exchange rate on a specified date. ...

See also
Bureau de change
A bureau de change is an organisation or facility which allows customers to exchange one currency for another. ...

The foreign exchange (currency or forex or FX) market exists wherever one currency is traded for another. It is the largest and most liquid financial market in the world, and includes trading between large banks, central banks, currency speculators, multinational corporations, governments, and other financial markets and institutions. The average daily trade in the global forex and related markets currently is almost US$ 4 trillion.[1] Market liquidity is a business or economics term that refers to the ability to quickly buy or sell a particular item without causing a significant movement in the price. ... Speculation is the buying, holding, and selling of stocks, commodities, futures, currencies, collectibles, real estate, or any valuable thing to profit from fluctuations in its price as opposed to buying it for use or for income - dividends, rent etc. ... multinational corporation (or transnational corporation) (MNC/TNC) is a corporation or enterprise that manages production establishments or delivers services in at least two countries. ... A government is an organization that has the power to make and enforce laws for a certain territory. ... In finance, financial markets facilitate: The raising of capital (in the capital markets); The transfer of risk (in the derivatives markets); and International trade (in the currency markets). ... The United States dollar is the official currency of the United States. ...

Contents

Market size and liquidity

The foreign exchange market is unique because of

  • its trading volumes,
  • the extreme liquidity of the market,
  • the large number of, and variety of, traders in the market,
  • its geographical dispersion,
  • its long trading hours: 24 hours a day except on weekends (from 5pm EST on Sunday until 4pm EST 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
Main foreign exchange market turnover, 1988 - 2007, measured in billions of USD.

As such, it has been referred to as the market closest to the ideal perfect competition, notwithstanding market manipulation by central banks. According to the BIS,[1] average daily turnover in global foreign exchange markets is estimated at $3.98 trillion. Trading in the world's main financial markets accounted for $3.21 trillion of this. Market liquidity is a business or economics term that refers to the ability to quickly buy or sell a particular item without causing a significant movement in the price. ... In finance, leverage (or gearing) is using given resources in such a way that the potential positive or negative outcome is magnified. ... Image File history File links No higher resolution available. ... Image File history File links No higher resolution available. ... Perfect competition is an economic model that describes a hypothetical market form in which no producer or consumer has the market power to influence prices. ... Market manipulation describes a deliberate attempt to interfere with the free and fair operation of the market and create artificial, false or misleading appearances with respect to the price of, or market for, a stock. ... Tax rates around the world Tax revenue as % of GDP Economic policy Monetary policy Central bank   Money supply Gold standard Fiscal policy Spending   Deficit   Debt Policy-mix Trade policy Tariff   Trade agreement Finance Financial market Financial market participants Corporate   Personal Public   Regulation Banking Fractional-reserve Full-reserve   Free banking Islamic...


This $3.21 trillion in main foreign exchange market turnover was broken down as follows:

Of the $3.98 trillion daily global turnover, trading in London accounted for around $1.36 trillion, or 34.1% of the total, making London by far the global center for foreign exchange. In second and third places respectively, trading in New York accounted for 16.6%, and Tokyo accounted for 6.0%. If you are trading FX Spot you are buying one currency with a different currency for immediate delivery and not future delivery. ... A forward contract is an agreement between two parties to buy or sell an asset (which can be of any kind) at a pre-agreed future point in time. ... Forex swap is an over the counter short term interest rate derivative instrument. ... This article is about the capital of England and the United Kingdom. ...


In addition to "traditional" turnover, $2.1 trillion was traded in derivatives. In finance, a derivative security is a contract that specifies the rights and obligations between the issuer of the security and the holder to receive or deliver future cash flows (or exchange of other securities or assets) based on some future event. ...


Exchange-traded forex futures contracts were introduced in 1972 at the Chicago Mercantile Exchange and are actively traded relative to most other futures contracts. Forex futures volume has grown rapidly in recent years, and accounts for about 7% of the total foreign exchange market volume, according to The Wall Street Journal Europe (5/5/06, p. 20). In finance, a futures contract is a standardized contract, traded on a futures exchange, to buy or sell a certain underlying instrument at a certain date in the future, at a specified price. ... President George W. Bush at the CME (March 6, 2001). ... The Wall Street Journal is an influential international daily newspaper published in New York City, New York with an average daily circulation of 1,800,607 (2002). ...

Top 10 currency traders [2]
% of overall volume, May 2008
Rank Name Volume
1 Flag of Germany Deutsche Bank 21.70%
2 Flag of Switzerland UBS AG 15.80%
3 Flag of the United Kingdom Barclays Capital 9.12%
4 Flag of the United States Citi 7.49%
5 Flag of the United Kingdom Royal Bank of Scotland 7.30%
6 Flag of the United States JPMorgan 4.19%
7 Flag of the United Kingdom HSBC 4.10%
8 Flag of the United States Lehman Brothers 3.58%
9 Flag of the United States Goldman Sachs 3.47%
10 Flag of the United States Morgan Stanley 2.86%


Foreign exchange trading increased by 38% between April 2005 and April 2006 and has more than doubled since 2001. This is largely due to the growing importance of foreign exchange as an asset class and an increase in fund management assets, particularly of hedge funds and pension funds. The diverse selection of execution venues such as internet trading platforms offered by companies such as First Prudential Markets and Saxo Bank have made it easier for retail traders to trade in the foreign exchange market. [3] Image File history File links Flag_of_Germany. ... Deutsche Bank AG (pronounced [2]) (ISIN: DE0005140008, NYSE: DB) (literal translation - German Bank) is a leading global investment bank with a broad private clients franchise, headquartered in Frankfurt, Germany. ... Image File history File links Flag_of_Switzerland. ... The UBS Tower in Chicago (photo by Krzysztof Makara) UBS AG (NYSE: UBS; SWX: UBSN; TYO: 8657) is a diversified global financial services company, with its main headquarters in Basel & Zürich, Switzerland. ... Image File history File links Flag_of_the_United_Kingdom. ... Barclays Capital is the investment banking division of Barclays Bank plc. ... Image File history File links This is a lossless scalable vector image. ... Citibank was founded in 1812 as City Bank of New York. ... Image File history File links Flag_of_the_United_Kingdom. ... The Royal Bank of Scotland Plc (Scottish Gaelic: [1]) is one of the retail banking subsidiaries of Royal Bank of Scotland Group plc, which together with NatWest, provides branch banking facilities in the United Kingdom. ... Image File history File links This is a lossless scalable vector image. ... J.P. Morgan Chase & Co. ... Image File history File links Flag_of_the_United_Kingdom. ... HSBC Holdings plc (traditional Chinese: ; simplified Chinese: ; pinyin: huìfÄ“ng kònggÇ” yÇ’uxiàn gōngsÄ«) (LSE: HSBA, SEHK: 0005, NYSE: HBC, Euronext: HSBC, BSX: 1077223879) is a public limited company incorporated in England and Wales, headquartered in London. ... Image File history File links This is a lossless scalable vector image. ... Lehman Brothers Holdings Inc. ... Image File history File links This is a lossless scalable vector image. ... The Goldman Sachs Group, Inc. ... Image File history File links This is a lossless scalable vector image. ... Morgan Stanley (NYSE: MS) is one of the largest and the most reputed investment banks headquartered in New York City. ... Electronic trading is a mode of trading that uses information technology to bring together a buyer and a seller through electronic media to create a virtual market place. ... First Prudential Markets, commonly known as FPM or FPMarkets is an Australian based investment company offering over-the-counter (OTC) and exchange traded derivative products including direct market access (DMA) Contracts-For-Difference (CFDs), foreign exchange (Forex) and global futures contracts to its a retail and professional client base. ...


Because foreign exchange is an OTC market where brokers/dealers negotiate directly with one another, there is no central exchange or clearing house. The biggest geographic trading centre is the UK, primarily London, which according to IFSL estimates has increased its share of global turnover in traditional transactions from 31.3% in April 2004 to 34.1% in April 2007. RPP Over-the-counter (OTC) trading is to trade financial instruments such as stocks, bonds, commodities or derivatives directly between two parties. ...


The ten most active traders account for almost 73% of trading volume, according to The Wall Street Journal Europe, (2/9/06 p. 20). These large international banks continually provide the market with both bid (buy) and ask (sell) prices. The bid/ask spread is the difference between the price at which a bank or market maker will sell ("ask", or "offer") and the price at which a market-maker will buy ("bid") from a wholesale customer. This spread is minimal for actively traded pairs of currencies, usually 0–3 pips. For example, the bid/ask quote of EUR/USD might be 1.2200/1.2203 on a retail broker. Minimum trading size for most deals is usually 100,000 units of currency, which is a standard "lot". The Wall Street Journal is an influential international daily newspaper published in New York City, New York with an average daily circulation of 1,800,607 (2002). ... The bid/offer spread is the difference between the buying (bid) and selling (offer) price of the same stock or currency transaction. ... A market maker is a person or a firm which quotes a buy and sell price in a financial instrument or commodity hoping to make a profit on the turn or the bid/offer spread. ... A Percentage in point (pip) is the smallest measure of Price move used in forex trading. ...


These spreads might not apply to retail customers at banks, which will routinely mark up the difference to say 1.2100 / 1.2300 for transfers, or say 1.2000 / 1.2400 for banknotes or travelers' checks. Spot prices at market makers vary, but on EUR/USD are usually no more than 3 pips wide (i.e. 0.0003). Competition is greatly increased with larger transactions, and pip spreads shrink on the major pairs to as little as 1 to 2 pips.


Market participants

Financial markets

Bond market
Fixed income
Corporate bond
Government bond
Municipal bond
Bond valuation
High-yield debt
This article does not cite any references or sources. ... Download high resolution version (480x640, 110 KB)Blockade in front of NYSE. Picture taken in April 2004. ... The bond market, also known as the debit, credit, or fixed income market, is a financial market where participants buy and sell debt securities usually in the form of bonds. ... This article does not cite any references or sources. ... A corporate bond is a bond issued by a corporation. ... A government bond is a bond issued by a national government denominated in the countrys own currency. ... In the United States, a municipal bond (or muni) is a bond issued by a state, city or other local government, or their agencies. ... Bond valuation is the process of determining the fair price of a bond. ... In finance, a high yield bond (non-investment grade bond, speculative grade bond or junk bond) is a bond that is rated below investment grade at the time of purchase. ...

Stock market
Stock
Preferred stock
Common stock
Registered share
Voting share
Stock exchange
A stock market or (equity market) is a private or public market for the trading of company stock and derivatives of company stock at an agreed price; both of these are securities listed on a stock exchange as well as those only traded privately. ... For other uses, see Stock (disambiguation). ... Preferred stock, also called preferred shares or preference shares, is typically a higher ranking stock than voting shares, and its terms are negotiated between the corporation and the investor. ... Common stock, also referred to as common shares, are, as the name implies, the most usual and commonly held form of stock in a corporation. ... A Registered share is a stock that is registered on the name of the exact owner. ... A voting share (also called common stock or ordinary share) is a stock giving a stockholder the right to vote on matters of corporate policy and the composition of the members of the board of directors. ...

Foreign exchange market

Derivatives market
Credit derivative
Hybrid security
Options
Futures
Forwards
Swaps
The derivatives markets are the financial markets for derivatives. ... // A credit derivative is a financial instrument or derivative (finance) whose price and value derives from the creditworthiness of the obligations of a third party, which is isolated and traded. ... Definition A hybrid security, as the name implies, is a security that combines two or more different financial instruments. ... This article is about options traded in financial markets. ... In finance, a futures contract is a standardized contract, traded on a futures exchange, to buy or sell a certain underlying instrument at a certain date in the future, at a specified price. ... A forward contract is an agreement between two parties to buy or sell an asset (which can be of any kind) at a pre-agreed future point in time. ... For the Thoroughbred horse racing champion, see: Swaps (horse). ...

Other Markets
Commodity market
Money market
OTC market
Real estate market
Spot market
Chicago Board of Trade Futures market Commodity markets are markets where raw or primary products are exchanged. ... This article is about short-term financing. ... Over-the-counter (OTC) trading is to trade financial instruments such as stocks, bonds, commodities or derivatives directly between two parties. ... Real estate is a legal term that encompasses land along with anything permanently affixed to the land, such as buildings. ... Template:The Spot Market The Spot Market or Cash Marketis a commodities or securities market in which goods are sold for cash and delivered immediately. ...


Finance series
Financial market
Financial market participants
Corporate finance
Personal finance
Public finance
Banks and Banking
Financial regulation
The field of finance refers to the concepts of time, money and risk and how they are interelated. ... This article does not cite any references or sources. ... There are two basic financial market participant catagories, Investor vs. ... Domestic credit to private sector in 2005 Corporate finance is an area of finance dealing with the financial decisions corporations make and the tools and analysis used to make these decisions. ... -1... Economic policy Monetary policy Central bank   Money supply Gold standard Fiscal policy Spending   Deficit   Debt Policy-mix Trade policy Tariff   Trade agreement Finance Financial market Financial market participants Corporate   Personal Public   Regulation Banking Fractional-reserve Full-reserve   Free banking Islamic        Public finance is a field of economics concerned with paying... For other uses, see Bank (disambiguation). ... Financial supervision is government supervision of financial institutions by regulators. ...

 v  d  e 

Unlike a stock market, where all participants have access to the same prices, the forex market is divided into levels of access. At the top is the inter-bank market, which is made up of the largest investment banking firms. Within the inter-bank market, spreads, which are the difference between the bid and ask prices, are razor sharp and usually unavailable, and not known to players outside the inner circle. As you descend the levels of access, the difference between the bid and ask prices widens (from 0-1 pip to 1-2 pips for some currencies such as the EUR). This is due to volume. If a trader can guarantee large numbers of transactions for large amounts, they can demand a smaller difference between the bid and ask price, which is referred to as a better spread. The levels of access that make up the forex market are determined by the size of the “line” (the amount of money with which they are trading). The top-tier inter-bank market accounts for 53% of all transactions. After that there are usually smaller investment banks, followed by large multi-national corporations (which need to hedge risk and pay employees in different countries), large hedge funds, and even some of the retail forex market makers. According to Galati and Melvin, “Pension funds, insurance companies, mutual funds, and other institutional investors have played an increasingly important role in financial markets in general, and in FX markets in particular, since the early 2000s.” (2004) In addition, he notes, “Hedge funds have grown markedly over the 2001–2004 period in terms of both number and overall size” Central banks also participate in the forex market to align currencies to their economic needs.


Banks

The interbank market caters for both the majority of commercial turnover and large amounts of speculative trading every day. A large bank may trade billions of dollars daily. Some of this trading is undertaken on behalf of customers, but much is conducted by proprietary desks, trading for the bank's own account.


Until recently, foreign exchange brokers did large amounts of business, facilitating interbank trading and matching anonymous counterparts for small fees. Today, however, much of this business has moved on to more efficient electronic systems. The broker squawk box lets traders listen in on ongoing interbank trading and is heard in most trading rooms, but turnover is noticeably smaller than just a few years ago. Trades on the floor of the New York Stock Exchange always involve a face-to-face interaction. ...


Commercial companies

An important part of this market comes from the financial activities of companies seeking foreign exchange to pay for goods or services. Commercial companies often trade fairly small amounts compared to those of banks or speculators, and their trades often have little short term impact on market rates. Nevertheless, trade flows are an important factor in the long-term direction of a currency's exchange rate. Some multinational companies can have an unpredictable impact when very large positions are covered due to exposures that are not widely known by other market participants.


Central banks

National central banks play an important role in the foreign exchange markets. They try to control the money supply, inflation, and/or interest rates and often have official or unofficial target rates for their currencies. They can use their often substantial foreign exchange reserves to stabilize the market. Milton Friedman argued that the best stabilization strategy would be for central banks to buy when the exchange rate is too low, and to sell when the rate is too high — that is, to trade for a profit based on their more precise information. Nevertheless, the effectiveness of central bank "stabilizing speculation" is doubtful because central banks do not go bankrupt if they make large losses, like other traders would, and there is no convincing evidence that they do make a profit trading. In macroeconomics, money supply (monetary aggregates, money stock) is the quantity of currency and money in bank accounts in the hands of the non-bank public available within the economy to purchase goods, services, and securities. ... Milton Friedman (July 31, 1912 – November 16, 2006) was an American Nobel Laureate economist and public intellectual. ...


The mere expectation or rumor of central bank intervention might be enough to stabilize a currency, but aggressive intervention might be used several times each year in countries with a dirty float currency regime. Central banks do not always achieve their objectives. The combined resources of the market can easily overwhelm any central bank.[4] Several scenarios of this nature were seen in the 1992–93 ERM collapse, and in more recent times in Southeast Asia. See: Intervention (counseling) - an orchestrated attempt by family and friends to get a family member to get help for addiction or other similar problem. ... Managed float regime is the current international financial environment in which exchange rates fluctuate from day to day, but central banks attempt to influence their countries exchange rates by buying and selling currencies. ... The European Exchange Rate Mechanism, ERM, was a system introduced by the European Community in March 1979, as part of the European Monetary System (EMS), to reduce exchange rate variability and achieve monetary stability in Europe, in preparation for Economic and Monetary Union and the introduction of a single currency...


Hedge funds

Hedge funds have gained a reputation for aggressive currency speculation since 1996. They control billions of dollars of equity and may borrow billions more, and thus may overwhelm intervention by central banks to support almost any currency, if the economic fundamentals are in the hedge funds' favor. A hedge fund is a private, largely unregulated pool of capital whose managers can buy or sell any assets, bet on falling as well as rising assets, and participate substantially in profits from money invested. ... Equity investment generally refers to the buying and holding of shares of stock on a stock market by individuals and funds in anticipation of income from dividends and capital gain as the value of the stock rises. ...


Investment management firms

Investment management firms (who typically manage large accounts on behalf of customers such as pension funds and endowments) use the foreign exchange market to facilitate transactions in foreign securities. For example, an investment manager with an international equity portfolio will need to buy and sell foreign currencies in the spot market in order to pay for purchases of foreign equities. Since the forex transactions are secondary to the actual investment decision, they are not seen as speculative or aimed at profit-maximization.


Some investment management firms also have more speculative specialist currency overlay operations, which manage clients' currency exposures with the aim of generating profits as well as limiting risk. Whilst the number of this type of specialist firms is quite small, many have a large value of assets under management (AUM), and hence can generate large trades. Currency overlay is conducted by specialist firms who manage the currency exposures of large clients, typically institutions such as pension funds, endowments and corporate entities. ...


Retail forex brokers

There are two types of retail broker: brokers offering speculative trading. Retail forex brokers or market makers handle a minute fraction of the total volume of the foreign exchange market. Retail traders (individuals) are a small fraction of this market and may only participate indirectly through brokers or banks, and might be subject to forex scams[5] [6]. In financial markets, the retail forex (retail currency trading or retail FX) market is a subset of the larger foreign exchange market. ... A market maker is a person or a firm which quotes a buy and sell price in a financial instrument or commodity hoping to make a profit on the turn or the bid/offer spread. ... In financial markets, the retail forex (retail currency trading or retail FX) market is a subset of the larger foreign exchange market. ... A commodity broker is a firm or individual who executes orders to buy or sell commodity contracts on behalf of clients and charges them a commission. ... A forex scam is any trading scheme used to defraud individual traders by convincing them that they can expect to gain an unreasonably high profit by trading in the foreign exchange market. ...


Other

Non-bank foreign exchange companies offer currency exchange and international payments to private individuals and companies. These are also known as Foreign Exchange Brokers but are distinct from Forex Brokers as they do not offer speculative trading but currency exchange with payments. i.e. there is usually a physical delivery of currency to a bank account.


It is estimated that in the UK, 14% of currency transfers/payments are made via Foreign Exchange Companies[7]. These companies' selling point is usually that they will offer better exchange rates or cheaper payments than the customer's bank. These companies differ from Money Transfer/Remittance Companies in that they generally offer higher-value services.


Money Transfer/Remittance Companies perform high-volume low-value transfers generally by economic migrants back to their home country. In 2007, the Aite Group estimated that there were $369 billion of remittances (an increase of 8% on the previous year). The four largest markets (India, China, Mexico and the Philippines) receive $95 billion. The largest and best known provider is Western Union with 345,000 agents globally.


Trading characteristics

Most traded currencies[1]
Currency distribution of reported FX market turnover
Rank Currency ISO 4217 code
(Symbol)
 % daily share
(April 2007)
1 Flag of the United States United States dollar USD ($) 86.3%
2 Flag of Europe Euro EUR (€) 37.0%
3 Flag of Japan Japanese yen JPY (¥) 16.5%
4 Flag of the United Kingdom Pound sterling GBP (£) 15.0%
5 Flag of Switzerland Swiss franc CHF (Fr) 6.8%
6 Flag of Australia Australian dollar AUD ($) 6.7%
7 Flag of Canada Canadian dollar CAD ($) 4.2%
8 Flag of Sweden Swedish krona SEK (kr) 2.8%
9 Flag of Hong Kong Hong Kong dollar HKD ($) 2.8%
10 Flag of Norway Norwegian krone NOK (kr) 2.2%
Other 19.7%
Total 200%

There is no unified or centrally cleared market for the majority of FX trades, and there is very little cross-border regulation. Due to the over-the-counter (OTC) nature of currency markets, there are rather a number of interconnected marketplaces, where different currencies instruments are traded. This implies that there is not a single exchange rate but rather a number of different rates (prices), depending on what bank or market maker is trading, and where it is. In practice the rates are often very close, otherwise they could be exploited by arbitrageurs instantaneously. Due to London's dominance in the market, a particular currency's quoted price is usually the London market price. A joint venture of the Chicago Mercantile Exchange and Reuters, called FxMarketSpace opened in 2007 and aspires to the role of a central market clearing mechanism. ISO 4217 is the international standard describing three letter codes (also known as the currency code) to define the names of currencies established by the International Organization for Standardization (ISO). ... Image File history File links This is a lossless scalable vector image. ... USD redirects here. ... Image File history File links This is a lossless scalable vector image. ... For other uses, see Euro (disambiguation). ... Image File history File links Flag_of_Japan. ... Yen redirects here. ... Image File history File links Flag_of_the_United_Kingdom. ... GBP redirects here. ... Image File history File links Flag_of_Switzerland. ... ISO 4217 Code CHF User(s) Switzerland, Liechtenstein, Campione dItalia Inflation 1. ... Image File history File links This is a lossless scalable vector image. ... ISO 4217 Code AUD User(s) Australia 6 countries and territories Kiribati Nauru Tuvalu Christmas Island Cocos (Keeling) Islands Norfolk Island Inflation 4. ... Image File history File links This is a lossless scalable vector image. ... C$ redirects here. ... Image File history File links Flag_of_Sweden. ... ISO 4217 Code SEK User(s) Sweden Inflation 2. ... Image File history File links Flag_of_Hong_Kong. ... ISO 4217 Code HKD User(s) Hong Kong Inflation 2. ... Image File history File links Flag_of_Norway. ... ISO 4217 Code NOK User(s) Norway Inflation 2. ... Over-the-counter (OTC) trading is to trade financial instruments such as stocks, bonds, commodities or derivatives directly between two parties. ... The abbreviation OTC may refer to: an Office of Technology Commercialization, the intellectual property managing office of many American research universities (sometimes referred to as an Office of Technology Transfer or OTT). ... Financial instruments package financial capital in readily tradeable forms - they do not exist outside the context of the financial markets. ... In economics and finance, arbitrage is the practice of taking advantage of a price differential between two or more markets: a combination of matching deals are struck that capitalize upon the imbalance, the profit being the difference between the market prices. ... President George W. Bush at the CME (March 6, 2001). ... Reuters Group plc (LSE: RTR and NASDAQ: RTRSY); pronounced is known as a financial market data provider and a news service that provides reports from around the world to newspapers and broadcasters. ... In banking and finance, clearing denotes all activities from the time a transaction is made until it is finally settled (see settlement). ...


The main trading center is London, but New York, Tokyo, Hong Kong and Singapore are all important centers as well. Banks throughout the world participate. Currency trading happens continuously throughout the day; as the Asian trading session ends, the European session begins, followed by the North American session and then back to the Asian session, excluding weekends. This article is about the capital of England and the United Kingdom. ... This article is about the state. ... For other uses, see Tokyo (disambiguation). ...


There is little or no 'inside information' in the foreign exchange markets. Exchange rate fluctuations are usually caused by actual monetary flows as well as by expectations of changes in monetary flows caused by changes in GDP growth, inflation, interest rates, 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. Insider trading is the trading of a corporations stock or other securities (e. ... GDP is an acronym which can stand for more than one thing: (in economics) an abbreviation for Gross Domestic Product. ... Balance of trade figures are the sum of the money gained by a given economy by selling exports, minus the cost of buying imports. ... The phrase mergers and acquisitions (M&A) refers to the aspect of business strategy and management dealing with the merging and/or acquiring of different companies. ...


Currencies are traded against one another. Each pair of currencies thus constitutes an individual product and is traditionally noted XXX/YYY, where YYY is the ISO 4217 international three-letter code of the currency into which the price of one unit of XXX is expressed (called base currency). For instance, EUR/USD is the price of the euro expressed in US dollars, as in 1 euro = 1.5465 dollar. Out of convention, the first currency in the pair, the base currency, was the stronger currency at the creation of the pair. The second currency, counter currency, was the weaker currency at the creation of the pair. ISO 4217 is the international standard describing three letter codes (also known as the currency code) to define the names of currencies established by the International Organization for Standardization (ISO). ... In Foreign exchange markets, the base currency is the first currency in a currency pair. ... For other uses, see Euro (disambiguation). ... The United States dollar is the official currency of the United States. ...


The factors affecting XXX will affect both XXX/YYY and XXX/ZZZ. This causes positive currency correlation between XXX/YYY and XXX/ZZZ. Several sets of (x, y) points, with the correlation coefficient of x and y for each set. ...


On the spot market, according to the BIS study, the most heavily traded products were: The spot price of a commodity or a security or a currency is the price that is quoted for settlement (payment and delivery) of the transaction immediately. ...

  • EUR/USD: 27 %
  • USD/JPY: 13 %
  • GBP/USD (also called sterling or cable): 12 %

and the US currency was involved in 86.3% of transactions, followed by the euro (37.0%), the yen (16.5%), and sterling (15.0%) (see table). Note that volume percentages should add up to 200%: 100% for all the sellers and 100% for all the buyers. GBP redirects here. ... A foreign exchange term used for the GBP/USD currency pair rate (British Pound vs. ...


Trading in the euro has grown considerably since the currency's creation in January 1999, and how long the foreign exchange market will remain dollar-centered is open to debate. Until recently, trading the euro versus a non-European currency ZZZ would have usually involved two trades: EUR/USD and USD/ZZZ. The exception to this is EUR/JPY, which is an established traded currency pair in the interbank spot market. As the dollar's value has eroded during 2008, interest in using the euro as reference currency for prices in commodities (such as oil), as well as a larger component of foreign reserves by banks, has increased dramatically. Transactions in the currencies of commodity-producing countries, such as AUD, NZD, CAD, have also increased. Events of 2008: (EMILY) Me Lesley and MIley are going to China! This article is about the year. ... 2008 (MMVIII) is the current year, a leap year that started on Tuesday of the Common Era (or Anno Domini), in accordance with the Gregorian calendar. ...


Factors affecting currency trading

See also: Exchange rates

Although exchange rates are affected by many factors, in the end, currency prices are a result of supply and demand forces. The world's currency markets can be viewed as a huge melting pot: in a large and ever-changing mix of current events, supply and demand factors are constantly shifting, and the price of one currency in relation to another shifts accordingly. No other market encompasses (and distills) as much of what is going on in the world at any given time as foreign exchange. In finance, the exchange rate between two currencies specifies how much one currency is worth in terms of the other. ... Look up supply in Wiktionary, the free dictionary. ... The supply and demand model describes how prices vary as a result of a balance between product availability at each price (supply) and the desires of those with purchasing power at each price (demand). ...


Supply and demand for any given currency, and thus its value, are not influenced by any single element, but rather by several. These elements generally fall into three categories: economic factors, political conditions and market psychology. Economics (deriving from the Greek words οίκω [okos], house, and νέμω [nemo], rules hence household management) is the social science that studies the allocation of scarce resources to satisfy unlimited wants. ... Politics is the process by which decisions are made within groups. ... Nobel Prize in Economics winner Daniel Kahneman, was an important figure in the development of behavioral finance and economics and continues to write extensively in the field. ...


Economic factors

These include economic policy, disseminated by government agencies and central banks, economic conditions, generally revealed through economic reports, and other economic indicators. A central bank is an entity responsible for monetary policy of its country (or in the case of the EU, group of member countries). ... Wikipedia does not yet have an article with this exact name. ...


Economic policy comprises government fiscal policy (budget/spending practices) and monetary policy (the means by which a government's central bank influences the supply and "cost" of money, which is reflected by the level of interest rates). Fiscal policy is the economic term that defines the set of principles and decisions of a government in setting the level of public expenditure and how that expenditure is funded. ... Tax rates around the world Tax revenue as % of GDP Economic policy Monetary policy Central bank   Money supply Fiscal policy Spending   Deficit   Debt Trade policy Tariff   Trade agreement Finance Financial market Financial market participants Corporate   Personal Public   Banking   Regulation        Monetary policy is the process by which the government, central bank... An interest rate is the rental price of money. ...


Economic conditions include:


Government budget deficits or surpluses: The market usually reacts negatively to widening government budget deficits, and positively to narrowing budget deficits. The impact is reflected in the value of a country's currency. A budget deficit occurs when an entity (often a government) spends more money than it takes in. ...


Balance of trade levels and trends: The trade flow between countries illustrates the demand for goods and services, which in turn indicates demand for a country's currency to conduct trade. Surpluses and deficits in trade of goods and services reflect the competitiveness of a nation's economy. For example, trade deficits may have a negative impact on a nation's currency. Balance of trade figures are the sum of the money gained by a given economy by selling exports, minus the cost of buying imports. ...


Inflation levels and trends: Typically, a currency will lose value if there is a high level of inflation in the country or if inflation levels are perceived to be rising. This is because inflation erodes purchasing power, thus demand, for that particular currency. However, a currency may sometimes strengthen when inflation rises because of expectations that the central bank will raise short-term interest rates to combat rising inflation. Purchasing Power- the amount of value of a good/services compared to the amount paid. ...


Economic growth and health: Reports such as gross domestic product (GDP), employment levels, retail sales, capacity utilization and others, detail the levels of a country's economic growth and health. Generally, the more healthy and robust a country's economy, the better its currency will perform, and the more demand for it there will be. GDP is an acronym which can stand for more than one thing: (in economics) an abbreviation for Gross Domestic Product. ... This article is about work. ... In commerce, a retailer buys goods or products in large quantities from manufacturers or importers, either directly or through a wholesaler, and then sells individual items or small quantities to the general public or end user customers, usually in a shop, also called store. ... Capacity utilization is a concept in Economics which refers to the extent to which an enterprise or a nation actually uses its installed productive capacity. ... World GDP/capita changed very little for most of human history before the industrial revolution. ...


Political conditions

Internal, regional, and international political conditions and events can have a profound effect on currency markets. Politics is the process by which decisions are made within groups. ...


For instance, political upheaval and instability can have a negative impact on a nation's economy. The rise of a political faction that is perceived to be fiscally responsible can have the opposite effect. Also, events in one country in a region may spur positive or negative interest in a neighboring country and, in the process, affect its currency.


Market psychology

Market psychology and trader perceptions influence the foreign exchange market in a variety of ways: Nobel Prize in Economics winner Daniel Kahneman, was an important figure in the development of behavioral finance and economics and continues to write extensively in the field. ...


Flights to quality: Unsettling international events can lead to a "flight to quality," with investors seeking a "safe haven". There will be a greater demand, thus a higher price, for currencies perceived as stronger over their relatively weaker counterparts. The Swiss franc has been a traditional safe haven during times of political or economic uncertainty.[8] The term safe haven has several definitions including the following: A store of value that loses none or little of its value in the case of a stock market crash or times of hyperinflation. ... A safe haven is any security or other investment that loses none or little of its value in case of a market crash. ... ISO 4217 Code CHF User(s) Switzerland, Liechtenstein, Campione dItalia Inflation 1. ...


Long-term trends: Currency markets often move in visible long-term trends. Although currencies do not have an annual growing season like physical commodities, business cycles do make themselves felt. Cycle analysis looks at longer-term price trends that may rise from economic or political trends. [9] In investing, financial markets are commonly believed to have market trends[1] that can be classified as primary trends, secondary trends (short-term), and secular trends (long-term). ... The business cycle or economic cycle refers to the fluctuations of economic activity about its long term growth trend. ...


"Buy the rumor, sell the fact:" This market truism can apply to many currency situations. It is the tendency for the price of a currency to reflect the impact of a particular action before it occurs and, when the anticipated event comes to pass, react in exactly the opposite direction. This may also be referred to as a market being "oversold" or "overbought".[10] To buy the rumor or sell the fact can also be an example of the cognitive bias known as anchoring, when investors focus too much on the relevance of outside events to currency prices. This article or section does not cite its references or sources. ... Anchoring or focalism is a term used in psychology to describe the common human tendency to rely too heavily, or anchor, on one trait or piece of information when making decisions. ...


Economic numbers: While economic numbers can certainly reflect economic policy, some reports and numbers take on a talisman-like effect: the number itself becomes important to market psychology and may have an immediate impact on short-term market moves. "What to watch" can change over time. In recent years, for example, money supply, employment, trade balance figures and inflation numbers have all taken turns in the spotlight. Wikipedia does not yet have an article with this exact name. ... In macroeconomics, money supply (monetary aggregates, money stock) is the quantity of currency and money in bank accounts in the hands of the non-bank public available within the economy to purchase goods, services, and securities. ... This article is about work. ... Balance of trade figures are the sum of the money gained by a given economy by selling exports, minus the cost of buying imports. ...


Technical trading considerations: As in other markets, the accumulated price movements in a currency pair such as EUR/USD can form apparent patterns that traders may attempt to use. Many traders study price charts in order to identify such patterns. [11] Technical analysis is the study of market action, primarily through the use of charts, for the purpose of forecasting future price trends. ...


Algorithmic trading in forex

Electronic trading is growing in the FX market, and algorithmic trading is becoming much more common. According to financial consultancy Celent estimates, by 2008 up to 25% of all trades by volume will be executed using algorithm, up from about 18% in 2005.[citation needed] Electronic trading is a mode of trading that uses information technology to bring together a buyer and a seller through electronic media to create a virtual market place. ... In electronic financial markets, algorithmic trading, also known as algo, automated, black-box, or robo trading, is the use of computer programs for entering trading orders with the computer algorithm deciding on certain aspects of the order such as the timing, price, or even the final quantity of the order. ...


Financial instruments

Spot

A spot transaction is a two-day delivery transaction (except in the case of the Canadian dollar, which settles the next day), as opposed to the futures contracts, which are usually three months. This trade represents a “direct exchange” between two currencies, has the shortest time frame, involves cash rather than a contract; and interest is not included in the agreed-upon transaction. The data for this study come from the spot market. Spot has the largest share by volume in FX transactions among all instruments. The spot price of a commodity or a security or a currency is the price that is quoted for settlement (payment and delivery) of the transaction immediately. ... In finance, a futures contract is a standardized contract, traded on a futures exchange, to buy or sell a certain underlying instrument at a certain date in the future, at a specified price. ... Template:The Spot Market The Spot Market or Cash Marketis a commodities or securities market in which goods are sold for cash and delivered immediately. ... Quantity is a kind of property which exists as magnitude or multitude. ...


Forward

See also: forward contract

One way to deal with the Forex risk is to engage in a forward transaction. In this transaction, money does not actually change hands until some agreed upon future date. A buyer and seller agree on an exchange rate for any date in the future, and the transaction occurs on that date, regardless of what the market rates are then. The duration of the trade can be a few days, months or years. A forward contract is an agreement between two parties to buy or sell an asset (which can be of any kind) at a pre-agreed future point in time. ... A forward contract is an agreement between two parties to buy or sell an asset (which can be of any kind) at a pre-agreed future point in time. ...


Future

Main article: Currency future

Foreign currency futures are forward transactions with standard contract sizes and maturity dates — for example, 500,000 British pounds for next November at an agreed rate. Futures are standardized and are usually traded on an exchange created for this purpose. The average contract length is roughly 3 months. Futures contracts are usually inclusive of any interest amounts. A currency future, also FX future or foreign exchange future, is a futures contract to exchange one currency for another at a specified date in the future at a price (exchange rate) that is fixed on the last trading date. ...


Swap

Main article: Forex swap

The most common type of forward transaction is the currency swap. In a swap, two parties exchange currencies for a certain length of time and agree to reverse the transaction at a later date. These are not standardized contracts and are not traded through an exchange. Forex swap is an over the counter short term interest rate derivative instrument. ... A currency swap is a foreign exchange agreement between two parties to exchange a given amount of one currency for another and, after a specified period of time, to give back the original amounts swapped. ...


Option

A foreign exchange option (commonly shortened to just FX option) is a derivative where the owner has the right but not the obligation to exchange money denominated in one currency into another currency at a pre-agreed exchange rate on a specified date. The FX options market is the deepest, largest and most liquid market for options of any kind in the world. In finance, a foreign exchange option (commonly shortened to just FX option or currency option) is a derivative financial instrument where the owner has the right but not the obligation to exchange money denominated in one currency into another currency at a pre-agreed exchange rate on a specified date. ... In finance, a foreign exchange option (commonly shortened to just FX option or currency option) is a derivative financial instrument where the owner has the right but not the obligation to exchange money denominated in one currency into another currency at a pre-agreed exchange rate on a specified date. ...


Exchange Traded Fund

Main article: Exchange-traded fund

Exchange-traded funds (or ETFs) are Open Ended investment companies that can be traded at any time throughout the course of the day. Typically, ETFs try to replicate a stock market index such as the S&P 500 (e.g. SPY), but recently they are now replicating investments in the currency markets with the ETF increasing in value when the US Dollar weakness versus a specific currency, such as the Euro. Certain of these funds track the price movements of world currencies versus the US Dollar, and increase in value directly counter to the US Dollar, allowing for speculation in the US Dollar for US and US Dollar denominated investors and speculators. An exchange-traded fund (or ETF) is an investment vehicle traded on stock exchanges, much like stocks or bonds. ... A comparison of three major stock indices: the NASDAQ Composite, Dow Jones Industrial Average, and S&P 500. ... The S&P 500 is an index containing the stocks of 500 Large-Cap corporations, most of which are American. ...


Speculation

Controversy about currency speculators and their effect on currency devaluations and national economies recurs regularly. Nevertheless, economists including Milton Friedman have argued that speculators ultimately are a stabilizing influence on the market and perform the important function of providing a market for hedgers and transferring risk from those people who don't wish to bear it, to those who do.[12] Other economists susch as Joseph Stiglitz consider this argument to be based more on politics and a free market philosophy than on economics.[13] Speculation involves the buying, holding, and selling of stocks, bonds, commodities, currencies, collectibles, real estate, derivatives or any valuable financial instrument to profit from fluctuations in its price as opposed to buying it for use or for income via methods such as dividends or interest. ... Milton Friedman (July 31, 1912 – November 16, 2006) was an American Nobel Laureate economist and public intellectual. ... In finance, a hedge is an investment that is taken out specifically to reduce or cancel out the risk in another investment. ... Joseph Stiglitz (born February 9, 1943) is an American economist, author and winner of Nobel Prize for economics ( 2001). ...


Large hedge funds and other well capitalized "position traders" are the main professional speculators. The term hedge fund dates back to the first such fund founded by Alfred Winslow Jones in 1949. ...


Currency speculation is considered a highly suspect activity in many countries. While investment in traditional financial instruments like bonds or stocks often is considered to contribute positively to economic growth by providing capital, currency speculation does not; according to this view, it is simply gambling that often interferes with economic policy. For example, in 1992, currency speculation forced the Central Bank of Sweden to raise interest rates for a few days to 500% per annum, and later to devalue the krona[14]. Former Malaysian Prime Minister Mahathir Mohamad is one well known proponent of this view. He blamed the devaluation of the Malaysian ringgit in 1997 on George Soros and other speculators.[15] Gamble redirects here. ... Mahathir bin Mohamad (born December 20, 1925 in Alor Star, Kedah) was the Prime Minister of Malaysia from July 16, 1981 to 2003. ... ISO 4217 Code MYR User(s) Malaysia Inflation 2. ... Soros redirects here. ...


Gregory Millman reports on an opposing view, comparing speculators to "vigilantes" who simply help "enforce" international agreements and anticipate the effects of basic economic "laws" in order to profit.[15]


In this view, countries may develop unsustainable financial bubbles or otherwise mishandle their national economies, and forex speculators allegedly made the inevitable collapse happen sooner. A relatively quick collapse might even be preferable to continued economic mishandling. Mahathir Mohamad and other critics of speculation are viewed as trying to deflect the blame from themselves for having caused the unsustainable economic conditions. Given that Malaysia recovered quickly after imposing currency controls directly against IMF advice, this view is open to doubt. Bubbles is a Swedish girls bubblegum pop group. ...


References

  1. ^ a b c Triennial Central Bank Survey (December 2007), Bank for International Settlements.
  2. ^ Source: Euromoney FX survey FX Poll 2008: The Euromoney FX survey is the largest global poll of foreign exchange service providers.'
  3. ^ http://www.ifsl.org.uk/uploads/CBS_Foreign_Exchange_2007.pdf[dead links] (December 2007), International Financial Services, London.
  4. ^ Alan Greenspan, The Roots of the Mortgage Crisis: Bubbles cannot be safely defused by monetary policy before the speculative fever breaks on its own. , the Wall Street Journal, December 12, 2007
  5. ^ McKay, Peter A. (2005-07-26). "Scammers Operating on Periphery Of CFTC's Domain Lure Little Guy With Fantastic Promises of Profits", The Wall Street Journal, Dow Jones and Company. Retrieved on 2007-10-31. 
  6. ^ Egan, Jack (2005-06-19). "Check the Currency Risk. Then Multiply by 100", The New York Times. Retrieved on 2007-10-30. 
  7. ^ The Sunday Times (UK), 16 July 2006
  8. ^ Safe haven currency
  9. ^ John J. Murphy, Technical Analysis of the Financial Markets (New York Institute of Finance, 1999), pp. 343–375.
  10. ^ Investopedia
  11. ^ Sam Y. Cross, All About the Foreign Exchange Market in the United States, Federal Reserve Bank of New York (1998), chapter 11, pp. 113–115.
  12. ^ Michael A. S. Guth, "Profitable Destabilizing Speculation," Chapter 1 in Michael A. S. Guth, SPECULATIVE BEHAVIOR AND THE OPERATION OF COMPETITIVE MARKETS UNDER UNCERTAINTY, Avebury Ashgate Publishing, Aldorshot, England (1994), ISBN 1856289850.
  13. ^ What I Learned at the World Economic Crisis Joseph Stiglitz, The New Republic, April 17, 2000, reprinted at GlobalPolicy.org
  14. ^ http://www.iht.com/articles/1992/09/17/perc.php
  15. ^ a b Gregory J. Millman, Around the World on a Trillion Dollars a Day, Bantam Press, New York, 1995.

Squalltoonix (born March 6, 1926 in New York City) is an American economist and was Chairman of the Board of Governors of the Federal Reserve of the United States from 1987 to 2006. ... The Wall Street Journal is an influential international daily newspaper published in New York City, New York with an average daily circulation of 1,800,607 (2002). ... Year 2005 (MMV) was a common year starting on Saturday (link displays full calendar) of the Gregorian calendar. ... July 26 is the 207th day of the year (208th in leap years) in the Gregorian calendar. ... The Wall Street Journal (WSJ) is an international daily newspaper published by Dow Jones & Company in New York City, New York, USA, with Asian and European editions, and a worldwide daily circulation of more than 2 million as of 2006, with 931,000 paying online subscribers. ... Year 2007 (MMVII) was a common year starting on Monday of the Gregorian calendar in the 21st century. ... is the 304th day of the year (305th in leap years) in the Gregorian calendar. ... Year 2005 (MMV) was a common year starting on Saturday (link displays full calendar) of the Gregorian calendar. ... is the 170th day of the year (171st in leap years) in the Gregorian calendar. ... The New York Times is a daily newspaper published in New York City and distributed internationally. ... Year 2007 (MMVII) was a common year starting on Monday of the Gregorian calendar in the 21st century. ... is the 303rd day of the year (304th in leap years) in the Gregorian calendar. ... The Federal Reserve Bank of New York is the most important of the twelve Federal Reserve Banks of the United States. ...

See also

The balance of trade encompasses the activity of exports and imports, like the work of this cargo ship going through the Panama Canal. ... Wikipedia does not have an article with this exact name. ... A currency pair depicts a quotation of two different currencies. ... A Foreign currency mortgage is a mortgage which is repayable in a currency other than the currency of the country in which the borrower is a resident. ... A way for companies to eliminate foreign exchange (FOREX) risk when dealing in foreign currencies. ... Foreign exchange reserves (also called Forex reserves) in a strict sense are only the foreign currency deposits held by central banks and monetary authorities. ... A forex scam is any trading scheme used to defraud individual traders by convincing them that they can expect to gain an unreasonably high profit by trading in the foreign exchange market. ... Forex swap is an over the counter short term interest rate derivative instrument. ... In financial markets, the retail forex (retail currency trading or retail FX) market is a subset of the larger foreign exchange market. ... Special Drawing Rights (SDRs) is a potential claim on the freely usable currencies of International Monetary Fund members. ... A Tobin tax is the suggested tax on all trade of currency across borders. ... The euro and US dollar are by far the most used currencies in terms of global reserves. ... EBS (Electronic Broking Services) was created by a partnership of the worlds largest foreign exchange market making banks. ... Reuters Group plc (LSE: RTR and NASDAQ: RTRSY); pronounced is known as a financial market data provider and a news service that provides reports from around the world to newspapers and broadcasters. ...

External links

  • Benchmark Currency Rates from Bloomberg
  • CFTC Commission Advisory Customer fraud Protection
  • Federal Reserve daily update
  • Microstructure effects, bid-ask spreads and volatility in the spot foreign exchange market pre and post-EMU Technical description of FX market workings.

  Results from FactBites:
 
Foreign Exchange Markets: Structure and Systemic Risks - Finance & Development - December 1996 (3404 words)
LAURA E. Foreign exchange trading involves such large cross-border settlements that a failure by one party to deliver the currency needed for a single settlement could disrupt the global financial system.
Even though 56 percent of the world's foreign exchange transactions are executed in the three largest financial centers, between one-half and three-fourths of daily turnover is cross-border during the centers' business hours, suggesting that one side of many transactions occurs outside of their business hours.
Foreign exchange contracts account for 64 percent of the gross market value of $2.2 trillion, which itself represents roughly 5 percent of reported notional principal.
The ABCs of the Foreign Exchange Market (2552 words)
An exchange rate is simply the price of one currency in terms of another, and the market in which foreign currencies are exchanged is called the foreign exchange market.
Exchange rates are quoted in two ways: the price of a foreign currency in terms of dollars (also called the American or direct terms), or the number of foreign-currency units per per unit of national currency (the British terms).
This market, which accounts for 50 percent of the foreign exchange market, sets the tone for the daily activities of the market, but buyers and sellers may be exposed to foreign exchange risk.
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