PYDEM/GBPDEM/CHFDEM/FRFDEM/XEUDEM/OthEMSDEM/OthOthEMS/OthEMS3Other currency pairsAll currency pairs
19982
1995
2001
Amount % share Amount % share Amount % share Amount % share–1921913431557749251848––––1823131062120325778
–2522620106326––––232113303100
–25451181042427861382972––––24211834638163301,137
–224292175336––––222313103100
–2915817176257118795042172––––24311810335185311,430
–20411218853312––––221102102100
352––––23012557504719730241222––––––––241,173
30
2011544173212
2100
1 Adjusted for local and cross-border double-counting.2 Revised.3 The data cover local home currency trading only.
Source: Bank for International Settlement – Central bank survey of foreign exchange and derivatives market activityApril 2001: preliminary global data.Reproduced by permission of the Bank for International Settlement
Market Overview
23
exchange market, in one form or another. Most currencies operate under ﬂoating exchangerate mechanism against one another. The rates can rise or fall depending largely on economic,political and military situations in a given country.
CONCLUDING REMARKSThe foreign exchange market consists of a global network, where currencies are bought andsold 24 hours a day. What began as a way of facilitating trade across country borders hasgrown into one of the most liquid, hectic and volatile ﬁnancial markets in the world – wherethe players have the potential to generate huge proﬁts or losses.
4Major ParticipantsParticipants in the foreign exchange market are many and varied and the individual involvement of each participant can vary dramatically. Surveys over recent years tend to indicatethat participants can broadly be divided into three main groups: banks, brokers and clients.Commercial banks are by far the most active, while brokers act as intermediaries. Clients canbe classed as anything from multinational corporations to individual investors to speculators.Who then are the active participants in this global market?
4.1 GOVERNMENTSGovernments sometimes have requirements for foreign currency. This may be for paying staffsalaries and local bills of an embassy abroad, or for a foreign currency credit line, most oftenin dollars, to a third world national government for industrial or agricultural development. Inits turn, the third world nation’s government will periodically have to pay interest due on anyforeign loans, with the capital sum eventually having to be repaid. It is more than likely thatthe government would approach the market via its own central bank or a commercial bank.Foreign exchange rates are of particular concern to governments because changes in foreignexchange rates affect the value of products and ﬁnancial instruments. As a result, unexpectedor large changes can affect the health of a nation’s markets and ﬁnancial systems. Exchangerate changes also impact a nation’s international investment ﬂow, as well as export and importprices. These factors, in turn, can inﬂuence inﬂation and economic growth.For example, suppose the price of the Japanese yen moves from 120 yen per dollar to 110yen per dollar over the course of a few weeks. In market jargon, the yen is ‘strengthening’, orbecoming more expensive against the dollar. If the new exchange rate persists, it will lead toseveral related effects:1. Japanese exports to America will become more expensive. Over time, this might causeexport volumes to America to decline, which, in turn, might lead to job losses in Japan.2. The higher American import prices might be an inﬂationary inﬂuence in America.3. American exports to Japan will become less expensive, which might lead to an increase inAmerican exports and a boost to American employment.
4.2 BANKS4.2.1 Central banksCentral banks are the traditional moderators of excess. The Bank of England, the EuropeanCentral Bank, the Swiss National Bank, the Bank of Japan and, to a lesser extent, the FederalReserve Bank will enter the market to correct what are felt to be unnecessarily large movements,often in conjunction with one another. By their actions, however, they can sometimes createthe excesses they are speciﬁcally trying to prevent.
26
A Foreign Exchange PrimerPlaza LouvreAccord Accord
Strong USD policy
270.000
220.000
170.000
120.000
70.000
86
85
87
89
88
90
91
92
93
94
95
96
97
98
99
00
01
02
Figure 4.1 G7 Intervention: US dollars for Japanese Yen (1998). Reproduced by permission ofStandard & Poor’sSource: MMS
Monetary authorities occasionally intervene in the foreign exchange market tocounter disorderly market conditions.For example, two recent instances of intervention involved the sale of dollars for yen in June1998 (Figure 4.1) and for euros in September 2000 (Figure 4.2).Plaza LouvreAccord Accord
Strong USD policy1.500
3.300
1.4001.3001.200
2.800
1.100
EUR-USD
1.000
2.3000.900
USD-DEM
0.8001.800
0.7000.600
1.300
0.500
85
86
87
88
89
90
91
92
93
94
95
96
97
98
99
00
01
02
Figure 4.2 G7 Intervention: US dollars for European euros (2000). Reproduced by permission ofStandard & Poor’sSource: MMS
Major Participants
27
Intervention, in general, does not shift the balance of supply and demand immediately.Instead, intervention affects the present and future behaviour of investors. In this regard,intervention is used as a device to signal a desired exchange rate movement.The second group of banks can best be described as aggressive managers of their reserves.Some of the Middle Eastern and Far Eastern central banks fall into this category. They aremajor speculative risk takers and their activities often disturb market equilibrium. Along sidethis activity, the central banks have clients in their own right and they will have commercialtransactions to undertake. In certain countries, central banks are involved in local ﬁxing sessionsbetween commercial banks, often acting as an adjudicator to the correct ﬁxing of the dailyrates, or to ensure that the supply and demand for foreign currency is balanced at a rate that isin line with its current monetary policy.4.2.2 Trading banksBanks (trading banks) deal with each other in the ‘interbank market’, where they are obligedto make a ‘two-way price’, i.e. to quote a bid and an offer (a buy and a sell price). Thiscategory is perhaps the largest and includes international, commercial and trade banks. Thebulk of today’s trading activity is concentrated between 100 and 200 banks world wide, out ofa possible 2000 dealer participants. These banks also deal with their clients, some of the moreimportant of which also qualify for two-way prices. In the vast majority of cases, however,most corporations will only be quoted according to their particular requirement. These banksrely on the knowledge of the market and their expertise in assessing trends in order to takeadvantage of them for speculative gain.4.2.3 Commercial banksCommercial banks (clearing banks in the UK) operate as international banks in the foreignexchange market, as do many retail banks in other major dealing centres. Many banks inthe UK have specialized regional branches to cater for all their clients’ foreign business,including foreign exchange. All this retail business will eventually be channelled throughto the bank’s City of London foreign exchange dealing room for consolidation with otherforeign currency positions either for market cover or continued monitoring by the specialistdealing-room personnel.The situation in America is slightly different, where legislation prohibits banks in certainstates from maintaining branch networks, but all banks have their afﬁliates or preferred agentsin the main dealing centres of New York, Chicago and Los Angles.Other commercial banks have large amounts of foreign exchange business to transact onbehalf of their clients, and although they will have their own dealing rooms, for one reason oranother they have not developed their operations to become involved in the interbank foreignexchange markets.4.2.4 Regional or correspondent banksRegional or correspondent banks do not make a market or carry positions and, in fact, turn tothe larger money centre banks to offset their risk. Such relationships have been built up overmany years of reciprocal service, and in many instances are mutual, whereby the correspondentbank abroad acts as the clearing agent in its own currency for the other bank involved.
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A Foreign Exchange Primer
4.2.5 Investment and merchant banksThe strength of investment and merchant banks lies in their corporate ﬁnance and capitalmarkets activities, which have been developed over many years’ servicing the ﬁnancial needsof large corporations, rather than retail clients. With the multi-currency sophistication of thecapital markets and the wide international spread of corporations and other market participants,they are frequently required to transact foreign exchange business, which they effect either bydealing direct or through the brokers’ market.
4.3 BROKERING HOUSESBrokering houses exist primarily to bring buyer and seller together at a mutually agreed price.The broker is not allowed to take a position in a currency and must act purely as a liaison.For this service, they receive a commission from both sides of the transaction, which will varyaccording to currency handled and from centre to centre.However, the use of live brokers has decreased in recent years, due mostly to the rise of thevarious interbank electronic brokerage systems.
4.4 INTERNATIONAL MONETARY MARKETThe International Monetary Market (IMM) in Chicago trades currencies for contract amounts,which are relatively small in size and for only four speciﬁc maturities a year. Originally designedfor the small investor, the IMM has grown apace since the early 1970s, and the major banks,whose original attitude was somewhat jaundiced, now ﬁnd that it pays to keep in touch withdevelopments on the IMM, which is often a market leader (Figures 4.3 and 4.4).
Figure 4.3 IMM commitment of traders (USD/CAD). Reproduced by permission of 4CAST LimitedSource: 4castweb.com
Major Participants
29
Figure 4.4 IMM commitment of traders (EUR/USD). Reproduced by permission of 4CAST LimitedSource: 4castweb.com
4.5 MONEY MANAGERSMoney managers tend to be large New York commission houses and are frequently veryaggressive players in the foreign exchange market. They act on behalf of their clients, but oftendeal on their own account. They are not limited to one time zone, but deal around the worldthrough their agents as each centre becomes operational.
4.6 CORPORATIONSCorporations are, in the ﬁnal analysis, the real end users of the foreign exchange market. Withthe exception only of the central banks that alter liquidity by means of their intervention, itis the corporate players by and large who affect supply and demand. When the other majorplayers enter the market to buy and sell currencies, they do so not because they have a need,but in the hope of a quick and proﬁtable return. The corporates, however, by coming to themarket to offset currency exposure, permanently change the liquidity of the currencies beingdealt with.
4.7 RETAIL CLIENTSAlongside these corporates, there is a non-too-signiﬁcant volume from retail clients. Thiscategory includes many smaller companies, hedge funds, companies specializing in investmentservices linked to foreign currency funds or equities, ﬁxed income brokers, the ﬁnancing ofaid programmes by registered worldwide charities and private individuals. With the rise inpopularity of online equity investing, and a corresponding rise in online ﬁxed income investing,it was only a matter of time before the average retail investor began to see opportunities in
30
A Foreign Exchange Primer
the foreign exchange market. Retail investors have been able to trade foreign exchange usinghighly leveraged margin accounts. The amount of trading, both in total volume and in individualtrade amounts, remains low and is certainly dwarfed by the corporate and interbank markets.
4.8 OTHERSOther ﬁnancial institutions involved in the foreign exchange market include:
r Stockbrokersr Commodity ﬁrmsr Insurance companiesr Charities and private institutionsr Private individuals.
4.9 SPECULATORSAll the above tend to have some sort of underlying exposure that has to be covered. Speculators,however, have no underlying exposure to hedge, rather they attempt to fulﬁl the adage ‘buylow, sell high’ by trading for trading proﬁt alone. Foreign exchange is an ideal speculative tool,offering volatility, liquidity and easy margin or leverage. This activity is vital to the stability ofthe markets. Without speculation, hedgers would ﬁnd the market too illiquid to accommodatetheir needs (Figure 4.5).While speculators seek excess proﬁts as a reward for their activities, the process of speculat-
Figure 4.5 Daily forecast of USD/CAD, EUR/USD ﬂows: speculators are caught by low liquidity andreal money buyer. Reproduced by permission of 4CAST LimitedSource: 4castweb.com
Major Participants
31
Trade and financial flows
Money market
Foreign exchange
Money market
SpotForwardSwapBorrow
Invest
Borrow
Invest
Currency swapCurrency optionCurrency futures
Figure 4.6 Financial ﬂows and available products
ing itself drives the markets towards lower volatility and price stability. No modern commodity,equity or debt market could operate without the speculators. It is estimated that up to 90% ofthe daily volume of trading activity in the foreign exchange markets is a result of speculatoractivity, with the balance primarily made up of commercial hedging transactions.
4.10 TRADE AND FINANCIAL FLOWSThe foreign exchange market provides the liquidity for all these market participants to converttheir trade and ﬁnancial ﬂows from the currency of one money centre to the currency of another.These participants buy and sell foreign exchange directly or indirectly from the interbankmarket, which comprises professional foreign exchange traders who operate in every ﬁnancialcentre of the world.These ﬂows and the products available to facilitate these conversions are shown inFigure 4.6. The products – the majority of which have been developed for the clients of theforeign exchange market rather than for professional traders – are also used to hedge or protectthe values of cash ﬂows, as these can be affected by the potential changes in the relationshipsof the currencies involved. The funds borrowed or invested in the money markets may alsoneed to be hedged for the same reasons.
5Roles PlayedTo make a market means to be willing and ready to buy and sell currencies.
5.1 MARKET MAKERSMarket makers are those market participants that buy and sell currencies. As market makers,dealers (or traders) generally, according to market practice, quote a two-way price to anothermarket maker, but not to most corporations.The terms ‘dealer’ and ‘trader’ are used interchangeably when referring to marketmakers.For market makers, reciprocity is standard practice. They constantly make prices to one another.Market makers are primarily major banks, for example, Barclays, Midland, J.P. Morgan Chase,Morgan Stanley, Deutsche Bank, Union Bank of Switzerland and Citibank.
5.2 PRICE TAKERSPrice takers are those market participants who seek to either buy or sell currencies. They areusually corporations and fund managers (investors). For price takers, there is no reciprocityinasmuch as they won’t quote prices back to the other market participants.
5.3 A NUMBER OF ROLESThe major participants in the market play a number of roles depending on their need for foreignexchange and the purpose of their activities:
r International money centre banks are market makers and deal with other market participants.r Regional banks deal with market makers to meet their own foreign exchange needs and thoseof their clients.
r Central banks are in the market to handle foreign exchange transactions for their governments, for certain state-owned entities and for other central banks. They also pay or receivecurrencies not usually held in reserves and stabilize markets through intervention.r Investment banks, like money centre banks, can be market makers and deal with other marketparticipants.r Corporations are generally price takers and usually enter into a foreign exchange transactionfor a speciﬁc purpose, such as to convert trade or capital ﬂows or to hedge a currency position.r Brokers are the intermediaries or middlemen in the market, and as such do not take positionson their own behalf. They act as a mechanism for matching deals between market makers.Brokers provide market makers with a bid and/or offer quote that has been left with them
34
A Foreign Exchange Primer
by other market makers. Brokers are bound by conﬁdentiality not to reveal the name of oneclient to another until after a deal has been completed.r Investors are usually managers of large investment funds and are a major force in movingexchange rates. They may engage in the market for hedging, investment and/or speculation.r Regulatory authorities, while not actually participants in the market, impact the market fromtime to time. Regulatory authorities include government and international bodies. Most of themarket is self-regulated, with guidelines of conduct being established by groups such as theBank for International Settlements (the BIS) and the International Monetary Fund (IMF).National governments can and do impose controls on foreign exchange by legislation ormarket intervention through the central banks.r Speculators seek excess proﬁts as a reward for their activities.
CONCLUDING REMARKSAll of the above activities can be undertaken by a variety of market participants. For example,banks may be market makers most of the time, but for some of the time they can also be hedgersor speculators.
6PurposesThe participants in the foreign exchange markets effect transactions for various purposes,principally arsing from the need to cover or hedge other ﬁnancial or commercial operations,although in practice it is sometimes difﬁcult to draw a clear line between these categories. Forexample, covering and hedging operations may well contain elements of speculation. Whateverthe nature of the transaction, they are initiated by the banks’ clients or by banks themselvesfor their own account.
6.1 TRANSACTIONSThe following are examples of those types of transaction, undertaken by all categories ofmarket participants, which are commonplace in the foreign exchange market today.6.1.1 Commercial TransactionsFor commercial transactions, manufacturing companies who buy in raw materials from abroadand export ﬁnished products undertake both purchases and sales of foreign exchange, alwaysdependent upon the companies’ domicile and the currency used for invoicing.Importers of goods, whether acting as principles or intermediaries, will undertake purchasesof foreign currency. Contractors involved in overseas projects will be market participantsas both buyers and sellers of foreign currency. Also, international insurance, shipping, airtransport and travel companies have need of frequent involvement in the market, as do anyother individuals or companies offering services overseas.6.1.2 FundingBanks and multinational corporations require speciﬁc wholesale funding for their commercialloan or other foreign investment portfolios, alongside day-to-day funding requirements of theirnet currency cash ﬂows.6.1.3 HedgingThe hedging of any open currency exposure is frequently better handled through off-balancesheet products, such as currency options, which ultimately will have an effect on the foreign exchange market. Also, companies involved in direct commercial investment overseas,the purchase and maintenance of plant and materials, or those ﬁnancing operations of foreign based subsidiaries, will be frequent participants in the market, as will property companies or individuals involved in the purchase and sale of property overseas. They may seekforeign currency ﬁnancing or may convert local currency funding via the foreign exchangemarket.
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A Foreign Exchange Primer
6.1.4 Portfolio InvestmentAdded to this group are banks and other entities involved in portfolio investment overseas,or dealing in foreign securities, who will, for position establishment and proﬁt realizationpurposes, be both buyers and sellers of foreign currencies.6.1.5 PersonalOn the personal transaction front, tourists, immigrants and emigrants making outward andinward remittances in foreign currency make up the bulk of the volume, if not the value, ofretail foreign exchange business transacted in the market. Royalties, commissions, patents andcopyrights from abroad will also be transacted in the market.
6.2 MARKET MAKINGMarket-making transactions by international banks is also a purpose for being involved in theforeign exchange market, and taking this role a stage further, the trading banks will seek to position themselves against anticipated currency movements. Positions can be set up defensivelyin the light of the banks’ known immediate (or future) requirements, or opportunistically, withdealers looking for a short-term gain. Today, there are many intra-day traders who will closeall long- and short-cash positions at the end of the trading day.
6.3 FOREIGN EXCHANGE EXPOSUREAs mentioned previously, many organizations are at risk to the ﬁnancial impact of the marketdue to changes in foreign exchange rates. In particular, there are three types of foreign exchangeexposure:Foreign exchange exposure is the risk of ﬁnancial impact due to changes in foreignexchange rates.
6.3.1 Transaction exposureTransaction exposure principally impacts a company’s proﬁt and loss and cash ﬂow. It results from transacting business in a currency that is different from the currency of the company’s home base. Companies face transaction exposure when they import or export goodsand services denominated in foreign currencies, or when they borrow or invest in foreigncurrencies.For example, when a small Irish vitamin company, a subsidiary of a large Dublin-based foodconglomerate, imports cod liver oil from Sweden, it is invoiced in Swedish krona. Payment isdue on delivery of the oil in three months, but in the next two weeks the food manufacturerhas to ﬁx the pricing levels and send a proﬁt and loss forecast for the next six months to thetreasurer of the parent company. The company has a transaction exposure because they have arisk that the Swedish krona will strengthen against the euro by the time the payment is due,making the cost of goods in euros greater than the company anticipated and possibly erodingtheir proﬁt margins.
Purposes
37
Of course, this exposure could be eliminated or mitigated through the use of foreign exchangeproducts, such as a forward contract, which could lock in a speciﬁc exchange rate for settlementat the time the payment is due.6.3.2 Translation exposureTranslation exposure principally impacts a company’s balance sheet and results from thetranslation of foreign assets and liabilities into the company’s home currency for accounting purposes. This occurs when the ﬁnancial statements of a company’s foreign subsidiariesare consolidated into the parent’s statements and translated into the parent’s reporting basecurrency. (Transaction and translation exposure occasionally overlap).For example, a Swiss food company has an American subsidiary in the sweet business. Thesubsidiary company had an asset value of 52.5 million Swiss francs (or $35 million) at thebeginning of the year, when the exchange rate was Sfr 1.50 per $1. There was no change inthe asset value of the subsidiary during the year due to operational reasons. In that time, however, the Swiss franc strengthened to Sfr 1.43 per $1. The asset value of the sweet company onthe Swiss company’s balance sheet has dropped to Sfr 50 050 000 ($35 million at 1.43) a loss ofSfr 2 450 000 (52 500 000 minus 50 050 000), simply from the translation of the Swiss company’s long-term investment in the American sweet company from dollars to Swiss francs.Again, this exposure can be eliminated or mitigated through the use of foreign exchangeproducts such as a forward contract or a currency option.6.3.3 Economic exposureEconomic exposure relates to a company’s exposure to foreign markets and suppliers. It canalso be referred to as competitive, strategic or operational exposure and is more difﬁcult toidentify. In fact, identiﬁcation of economic exposure involves in-depth forecasting to determinehow sensitive the company’s business is to changes in exchange rates. It recognizes that thevalue of a company is impacted by changes in the exchange rate on both its current andfuture products and markets. For instance, a company has foreign exchange exposure arisingfrom payables and receivables that are not yet booked but will most probably occur. As theseexposures cannot receive hedge accounting treatment, they are a problem for companies.An example often cited in discussing economic exposure is that of a major American ﬁlmmanufacturer whose main competitor in most of its markets is a large Japanese Company.The American company has an active exchange rate risk–management programme, whichrecognizes that when the value of the yen rises against the dollar – say, from an exchangerate of 150 to 140 – the American ﬁlm becomes more competitive with the Japanese ﬁlm inJapanese markets, and the Japanese ﬁlm becomes less competitive with the American ﬁlm inAmerican markets. When the yen weakens against the dollar – say, from an exchange rate of140 to 150 – it has the opposite competitive impact.Again, however, available products in the foreign exchange market can address any problemswith economic exposure.
CONCLUDING REMARKSToday, there are products available in the foreign exchange market that can address all typesof foreign exchange exposures and purposes. As mentioned in an earlier chapter, there are six
38
A Foreign Exchange Primer
basic foreign exchange products:
r spot transactionsr forward contractsr foreign exchange swapsr currency swapsr currency options andr foreign exchange futures contracts.
Part IIForeign Exchange Products
7Spot Foreign ExchangeForeign exchange rates are a means of expressing the value and worth of an economy by itscurrency vis-à-vis that of another. Normal market usage is to quote the exchange rate for spotvalue, i.e. for delivery two business days from the trade date (except Canadian transactionsagainst the dollar, when the spot date is only one day). The two business days are normallyrequired in order to enable the trade information between the counterparties involved to beagreed and to process the funds through the local clearing systems. The two payments aremade on the same date, regardless of the time zone difference (see Figure 7.1).Business day 0
Business day 1
Business day 2
Done date
Value date
Agree trade(price and amount)
Settlement(exchange currencypayments)
Figure 7.1 Example of a foreign exchange transaction
7.1 SPOT AND RECIPROCAL RATESThe rate used in a spot deal is the spot rate and is the price at which one currency can bebought or sold, expressed in terms of the other currency, for delivery on the spot value date.The ratio at which one currency is exchanged for another for settlement in twobusiness days (value date) is called the spot exchange rate.The spot exchange rate can be expressed in either currency, thus this price has two parts, thebase currency and the equivalent number of units of the other currency. For example, a rate forthe US dollar against the Swiss franc would be quoted as 1.6703. This means there are 1.6703Swiss francs to 1 dollar. When one rate is known, the spot exchange rate expressed in the othercurrency (the reciprocal) is easily calculated. The price of 1 dollar, expressed in Swiss francs,is 1/$0.5986 or Sfr 1.6703. Although some newspapers calculate and publish both exchangerates, it has become a standard market practice among traders to quote the foreign exchangefor most currencies as the amount of foreign currency that will be exchanged for 1 dollar. Forexample, if a bank trader was asked to quote a rate for Swiss francs against the dollar, theresponse would most probably be sfr 1.6703 rather than $0.5986. In this case, 1 dollar is the
42
A Foreign Exchange Primer
traded commodity and the trader is quoting the price in Swiss francs. This type of quotation isknown as ‘European terms’.
7.2 EUROPEAN AND AMERICAN TERMSNormally, the accepted practice is to quote in indirect or European terms. The price in dollarterms signiﬁes how many dollars a single unit of the foreign currency is worth. In this case,the foreign currency is the ﬁxed currency and the dollar is the variable currency.However, there are exceptions to this rule. In contrast, the European euro, the Britishpound, the Australian and New Zealand dollar, and some other old British area currencies,such as the Maltese pound, are quoted as the number of American dollars to the currency.This is an overhang from the days when these currencies were primarily quoted againststerling and therefore adopted the same quoting convention as sterling against the dollar.In this case, the currencies are always expressed in American or direct terms. For example, if a Swiss franc against the dollar price is expressed, it would read SFR 1.67/$1or $1 equals SFR 1.67. This means that it costs SFR 1.67 to buy $1. The American dollaris the ﬁxed currency and the Swiss franc is the variable currency. Alternatively, if a dollaragainst sterling price is expressed, it would read $1.43/£1 or £1 equals $1.43. This meansthat it costs $1.43 to buy £1. The pound is the ﬁxed currency and the dollar is the variablecurrency.An American term is merely the reciprocal of the rate derived using European terms.Thus, the usage of either European terms or American terms is based on market practices.A market trader would quote pounds sterling as $1.5310 per pound and euros as $0.9940 pereuro. This distinction is critical to understanding foreign exchange quotes and dealing screens.For example, when a corporate treasurer telephones a bank asking for foreign exchange quotes,the trader will assume that the treasurer understands market conventions and will quickly rattleoff prices for different currencies in the customary European or American terms.
7.3 SPOT TRANSACTIONS7.3.1 Bid – Offer SpreadsForeign currency traders are considered to be dealers when they make a two-way market price,i.e. not just quoting one rate but two.A bid is a price at which a trader is willing to buy a currency and an offer is a priceat which a trader is willing to sell a currency.A sample of two-way quotes is:EUR/USD 0.9945−0.9948USD/JPY 118.53−118.56USD/CHF 1.6703−1.6708
Spot Foreign Exchange
43
Like other ﬁnancial markets, the spread favours the dealer who buys currency at one priceand sells it at a slightly higher price. To determine whether a trade will take place at thedealer’s bid or offer rate, a corporate treasurer must ﬁrst know the currency in which the dealeris bidding or offering. That is, whether the transaction is quoted in European terms such