218 Module 8 The International Monetary System and Financial Forces TABLE 8 . 3 Average Exchange Rates on April 9, 2014 EXCHANGE RATE QUOTATIONS AND THE FX MARKET Table 8.3 is a partial listing of currency exchange rates on April 9, 2014. Prices are given for buying and selling. Assuming you are operating in dollars, you might want to look at how much of the foreign currency you can purchase per U.S. dollar or its reciprocal, how many U.S. dollars a unit of the other currency would buy. The reciprocal currency is a currency that is quoted as dollars per unit of currency instead of in units of currency per dollar. The exchange rate for a purchase or trade for delivery within two business days is known as the spot rate. The spot rate for the euro on April 9, 2014, in dollar terms, was $0.72630. There is also a forward currency market that allows managers to lock in contracts to purchase currencies at known rates, for delivery in the future. The forward rate is the exchange rate, the cost today, of a commitment to buy or sell an agreed amount of a currency at a fixed future date, usually 30, 60, 90, or 180 days from now. The forward rates can help you get a sense of where traders expect the currency’s value to be headed. Most newspapers no longer quote forward rates, but you can check them online. Now, let’s look at the way the FX market actually operates. Most of the transactions are over the counter (OTC), meaning that there is no actual trading floor; trades are done electronically. The market consists of banks and other large financial institutions such as pension funds and mutual funds. We’ve already mentioned buy and sell prices; they are known in the market as the bid and ask prices. The bid price is the highest-priced buy order currently in the market, while the ask price is the lowest-priced sell order currently in the market. The difference between the two, the bid–ask spread, provides a margin (the difference between the production or acquisition price and the selling price) for the bank or agency, which makes money both when they buy and when they sell in these trades. The rates listed on Internet sites are the interbank rates, the rates for customers buying large quantities, usually US$1 million or more. The rates charged to small customers are much less favorable to the customer. As you can imagine, the FX markets are large, liquid, and quite competitive, with trading occurring 24 hours a day through international banks. The Bank for International Settlements reported a $5.3 trillion average daily turnover for April 2013, which suggests that these FX markets are large and liquid. FX markets are largely unregulated as well. A Wall Street Journal writer described them as “a Wild West of global capitalism. . . . Unlike major stock and commodities markets, the foreign-exchange market, or FX, operates with virtually no government or regulatory oversight.”15 In 2008 Congress and the president gave the U.S. Commodity Futures Trading Commission (CFTC) control over the contracts executed in the United States that financial managers use to protect their transactions from risks, called swap and future contracts, as a result of the financial crisis that began that year. The CFTC is now acting as a regulator in these FX markets and forming regulations. In 2013, the assets of Champion Management reciprocal currency In FX, using the dollar as the base currency, a currency that is quoted as dollars per unit of currency instead of in units of currency per dollar spot rate The exchange rate between two currencies for delivery within two business days forward currency market Trading market for currency contracts deliverable 30, 60, 90, or 180 days in the future forward rate The exchange rate between two currencies for delivery in the future, usually 30, 60, 90, or 180 days bid price Highest-priced buy order currently in the market ask price Lowest-priced sell order currently in the market Tuesday, April 9, 2014 Bid Ask EUR/USD 1.37674 1.37380 USD/EUR .72630 .72635 USD/JPY 102.51 102.53 USD/CAD 1.09461 1.09480 EUR/GBP .82544 .82560 EUR/CHF 1.21948 1.21973 GBP/USD 1.66770 1.66790 Source: http://www.oanda.com
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