CHAPTER5
THEMARKETFORFOREIGNEXCHANGE
SUGGESTEDANSWERSANDSOLUTIONSTOENDOFCHAPTERQUESTIONSANDPROBLEMS
QUESTIONS
1Giveafulldefi
itio
ofthemarketforforeig
excha
ge
A
swerBroadlydefi
edtheforeig
excha
geFXmarkete
compassestheco
versio
ofpurchasi
gpowerfromo
ecurre
cyi
toa
otherba
kdepositsofforeig
curre
cytheexte
sio
ofcreditde
omi
atedi
aforeig
curre
cyforeig
tradefi
a
ci
ga
dtradi
gi
foreig
curre
cyoptio
sa
dfuturesco
tracts
2Whatisthediffere
cebetwee
theretailorclie
tmarketa
dthewholesaleori
terba
kmarketforforeig
excha
ge
A
swer
Themarketforforeig
excha
geca
beviewedasatwotiermarket
O
etieristhe
wholesaleori
terba
kmarketa
dtheothertieristheretailorclie
tmarketI
ter
atio
alba
ksprovidethecoreoftheFXmarketTheysta
dwilli
gtobuyorsellforeig
curre
cyfortheirow
accou
tThesei
ter
atio
alba
ksservetheirretailclie
tscorporatio
sori
dividualsi
co
ducti
gforeig
commerceormaki
gi
ter
atio
ali
vestme
ti
fi
a
cialassetsthatrequiresforeig
excha
geRetailtra
sactio
saccou
tforo
lyabout14perce
tofFXtradesTheother86perce
tisi
terba
ktradesbetwee
i
ter
atio
alba
ksor
o
ba
kdealerslargee
oughtotra
sacti
thei
terba
kmarket
3Whoarethemarketparticipa
tsi
theforeig
excha
gemarket
A
swerThemarketparticipa
tsthatcomprisetheFXmarketca
becategorizedi
tofivegroupsi
ter
atio
alba
ksba
kcustomers
o
ba
kdealersFXbrokersa
dce
tralba
ksI
ter
atio
al
ba
ksprovidethecoreoftheFXmarketApproximately100to200ba
ksworldwidemakeamarketi
foreig
excha
geietheysta
dwilli
gtobuyorsellforeig
curre
cyfortheirow
accou
tThesei
ter
atio
alba
ksservetheirretailclie
tstheba
kcustomersi
co
ducti
gforeig
commerceormaki
gi
ter
atio
ali
vestme
ti
fi
a
cialassetsthatrequiresforeig
excha
geNo
ba
kdealersare
large
o
ba
kfi
a
ciali
stitutio
ssuchasi
vestme
tba
ksmutualfu
dspe
sio
fu
dsa
dhedgefu
dswhosesizea
dfreque
cyoftradesmakeitcosteffectivetoestablishtheirow
deali
groomstotradedirectlyi
thei
terba
kmarketfortheirforeig
excha
ge
eeds
IM1
fMosti
terba
ktradesarespeculativeorarbitragetra
sactio
swheremarketparticipa
tsattempttocorrectlyjudgethefuturedirectio
ofpricemoveme
tsi
o
ecurre
cyversusa
otherorattempttoprofitfromtemporarypricediscrepa
ciesi
curre
ciesbetwee
competi
gdealersFXbrokersmatchdealerorderstobuya
dsellcurre
ciesforafeebutdo
ottakeapositio
themselvesI
terba
ktradersuseabrokerprimarilytodissemi
ateasquicklyaspossibleacurre
cyquotetoma
yotherdealersCe
tralba
kssometimesi
terve
ei
theforeig
excha
gemarketi
a
attempttoi
flue
cethepriceofitscurre
cyagai
stthatofamajortradi
gpart
eroracou
tryr