BASIC INTRODUCTION TO FOREX MARKET

Interbank Market :

the wholesale market for foreign currencies in which the major banks trade.Accounts for 95% of all currency transactions.

In the Interbank Market:

Spot Market : where currencies are traded for immediate delivery (40%).
Forward Market: where currencies are traded for future delivery (9%).
Swap Market: a bundle of a spot and forward contract (51%).
FX Market: a network of banks, currency brokers, and dealers linked by computer terminal of phone.
Commercial Banks
Commercial Customers
FX Brokers
Central Banks
Transactions clear through the Clearing House Interbank Payments System.CHIPS handles an average of 105,000 transfers per day worth $350 billion.90% of all interbank transactions in U.S.

THE FORWARD MARKET:
Forward Contract:
    An agreement between a bank and a customer to exchange predetermined amounts of currency at a specified future date thus locking in a future exchange rate.

Purpose of Forward Contract:
    To hedge against future losses due to changes in exchange rates.
CALCULATING THE FORWARD    PREMIUM OR DISCOUNT
        
        =  F-S   x   12   x   100
               S        n
    where     F =     the forward rate of exchange
                  S =     the spot rate of  exchange
                  n =     the number of months in the forward contract