The Foreign Exchange Market

There are two main segments that define the foreign exchange market: the over-the-counter market (OTC), and the exchange-traded market. Most activity is in the OTC market, which is made up of commercial and investment banks as well as other financial institutions. The exchange-traded markets are securities exchanges in which foreign-exchange instruments are traded, such as the Chicago Mercantile Exchange or the Philadelphia Stock Exchange.

There are three types of traditional foreign-exchange instruments that are the most common:

Spot Transactions – A currency exchange the second day after an agreement to the transaction.

• Outright Forward Transactions – A currency exchange three or more days after an agreement to the transaction.
• FX Swap – A currency exchange in which currency is swapped on one day and then swapped back on a predetermined future date.

In addition to these traditional instruments, there are three other important foreign-exchange instruments:

• Currency Swaps – Exchanges of interest-bearing financial instruments.
• Options – The right, but not the obligation to trade foreign currency in the future.
• Futures Contract – Agreement to buy or sell a particular currency at a particular rate on a particular future date.

For additional information, contact Carl Phelps, Research Associate of GLOBAL ID, LLC. – a Management Consulting and International Market Research Company. http://www.identifyglobal.com/ (720) 334-6982