The Foreign Exchange Market

American terms

$/unit of currency

Foreign Exchange Market

A network of banks, foreign exchange brokers and dealers whose function is to bring buyers and sellers of foreign exchange together

Bank's profit

ASK-BID

Bid-Ask Spread

ASK-BID

Transaction costs

Bid-Ask Spread

Direct quotation

home price of foreign currency

Interbank Market

includes The spot market and The forward market

Cross Rates

Exchange rates between any two foreign currencies

Interbank Market

One of the two tiers of the FOREX market.An informal arrangement of larger commercial banks and a number of foreign exchange brokers linked together by telephone, telex and a satellite communications network .

Currency Arbitrage

Simultaneously buying and selling mispriced currencies and realizing a riskless profit

The forward market

forward rate is the exchange rate used for currency exchanges to take place xxx days from now

Indirect quotation

foreign currency price of home currency

BID

price at which bank will buy currency.

ASK

price at which bank will sell currency

The spot market

spot rate is the exchange rate for immediate transactions

European terms

unit of currency/$

Arbitrage

used to obtain riskless profit

Hedging

used to protect against the exchange rate risk derivative contract offsets existing cash contract

Speculation

used to speculate on one's belief derivative position independent of any cash position