Lecture 5 - The Market for Foreign Exchange

Foreign Exchange Market –Every three years, the Bank for International Settlements, the BIS, does a major survey of the foreign exchange markets. In the latest survey, the BIS estimates that the average turnover in the foreign exchange market, meaning spot transactions, forwards and swaps and currency options, in April 2013 was $5.3 trillion per day. Other years’ results:
| |1998 |2001 |2004 |2007 |2010 2013 |
|turnover ($trillions) |1.5 |1.2 |1.9 |3.3 |4 5.3 |
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Reduction between 1998 and 2001 due to (1) introduction of the euro which reduced currency trading in the individual currencies that subsequently made up the euro area and (2) trend of consolidation of the banking sector during that period, so there were fewer banks in the fx market trading amongst themselves. One significant change in the report is a significant increase in trading between foreign exchange dealers, primarily banks and their financial customers, most particularly, increased trading activity with hedge funds, mutual funds, pension funds and insurance companies. One continued trend is that the currency composition of foreign exchange trading has become more diversified. The most widely traded currency in traditional foreign exchange trading, again meaning spot, forward and swap transactions, is the US dollar, but the share of