International Transactions
International Transactions
The foreign-exchange market is based on the economic law of supply and demand. Sometimes governments intervene to control the flow of currency by having their central banks buy or sell currency in the open market. However, the central action in the foreign-exchange market revolves around the commercial banks in the major money centers of the world. In the 1989 New York Federal Reserve survey, it was determined that 82 percent of the foreign-exchange transactions were interbank; the remaining 18 percent were divided between the futures and options market, financial customers, and nonfinancial customers.
The world's communication networks are now so good, and so many countries have fairly unrestricted markets that we can talk of a single world market. It starts in a small way in New Zealand around 9:00 A.M. New Zealand time, just in time to catch the tail end of the previous night's New York market. Two or three hours later, Tokyo opens, followed an hour later by Hong Kong and Manila and then half an hour later by Singapore. By now, with the Far East market in full swing, the focus moves to the Near and Middle East. Bombay opens two hours after Singapore, followed after an hour and a half by Abu Dhabi, with Jeddah an hour behind, and Athens and Beirut an hour behind still. By this stage trading in the Far and Middle East is usually thin and perhaps nervous as dealers wait to see how Europe will trade. Paris and Frankfurt open an hour ahead of London, and by this time Tokyo is starting to close down, so the European market can judge how the Japanese market has been trading by the way they deal to close out positions. By lunch-time in London, New York is starting to open up, and as Europe closes down, so positions can be passed westward. During the afternoon in New York, trading tends to be quiet. The problem is that there is nowhere to pass a position to. The San Francisco market, three hours behind, is effectively a satellite of the New York market. Very small positions can be passed on to New Zealand banks, but the market there is extremely limited.1
According to the Federal Reserve Bank of New York, the daily foreign-exchange volume conducted in London was $187 billion, compared with $129 billion in New York and $115 billion in Tokyo (see Fig. 7.2). The Lon-
don market is pivotal because of its central position in trading hours vis-a-vis the rest of the world and its greater transaction opportunities. London trading increased to $187 billion in 1989 from $90 billion daily in 1986, $49 billion daily in 1984, and $25 billion daily in 1979.
Daily foreign-exchange trading in the United States increased from $26 billion in 1983 to $50 billion in 1986 and $129 billion in 1989. As noted in Fig. 7.3, the most actively traded currencies in the United States in order of importance were the German mark, the Japanese yen, the British pound, and the Swiss franc.
Most transactions are handled in the interbank market. Even in interbank dealings, the majority of the transactions are done by traders in the home offices of the major money center banks. Typically these traders are responsible for a single currency, and they end up dealing with the traders of that currency worldwide. Each money center bank, such as Chase Manhattan or Manufacturers Hanover Trust, has a trading room where the currency traders are housed, allowing them contact with each other as well as with the major traders worldwide.
Sometimes the bankers go through brokers instead of working directly with traders of other banks. A few major brokers and several minor ones in the United States deal in foreign-exchange transactions. These brokers typically try to link traders of different banks in foreign-exchange transactions. Brokers sometimes work the corporate market as well, but that is rare in comparison with their major area of specialty.
Even though the money center banks trade most of the foreign exchange in the world, companies that are not located in these money centers still can go through regional or local banks for foreign-currency transactions. However, their banks generally work through a money center bank
The foreign-exchange market is based on the economic law of supply and demand. Sometimes governments intervene to control the flow of currency by having their central banks buy or sell currency in the open market. However, the central action in the foreign-exchange market revolves around the commercial banks in the major money centers of the world. In the 1989 New York Federal Reserve survey, it was determined that 82 percent of the foreign-exchange transactions were interbank; the remaining 18 percent were divided between the futures and options market, financial customers, and nonfinancial customers.
The world's communication networks are now so good, and so many countries have fairly unrestricted markets that we can talk of a single world market. It starts in a small way in New Zealand around 9:00 A.M. New Zealand time, just in time to catch the tail end of the previous night's New York market. Two or three hours later, Tokyo opens, followed an hour later by Hong Kong and Manila and then half an hour later by Singapore. By now, with the Far East market in full swing, the focus moves to the Near and Middle East. Bombay opens two hours after Singapore, followed after an hour and a half by Abu Dhabi, with Jeddah an hour behind, and Athens and Beirut an hour behind still. By this stage trading in the Far and Middle East is usually thin and perhaps nervous as dealers wait to see how Europe will trade. Paris and Frankfurt open an hour ahead of London, and by this time Tokyo is starting to close down, so the European market can judge how the Japanese market has been trading by the way they deal to close out positions. By lunch-time in London, New York is starting to open up, and as Europe closes down, so positions can be passed westward. During the afternoon in New York, trading tends to be quiet. The problem is that there is nowhere to pass a position to. The San Francisco market, three hours behind, is effectively a satellite of the New York market. Very small positions can be passed on to New Zealand banks, but the market there is extremely limited.1
According to the Federal Reserve Bank of New York, the daily foreign-exchange volume conducted in London was $187 billion, compared with $129 billion in New York and $115 billion in Tokyo (see Fig. 7.2). The Lon-
don market is pivotal because of its central position in trading hours vis-a-vis the rest of the world and its greater transaction opportunities. London trading increased to $187 billion in 1989 from $90 billion daily in 1986, $49 billion daily in 1984, and $25 billion daily in 1979.
Daily foreign-exchange trading in the United States increased from $26 billion in 1983 to $50 billion in 1986 and $129 billion in 1989. As noted in Fig. 7.3, the most actively traded currencies in the United States in order of importance were the German mark, the Japanese yen, the British pound, and the Swiss franc.
Most transactions are handled in the interbank market. Even in interbank dealings, the majority of the transactions are done by traders in the home offices of the major money center banks. Typically these traders are responsible for a single currency, and they end up dealing with the traders of that currency worldwide. Each money center bank, such as Chase Manhattan or Manufacturers Hanover Trust, has a trading room where the currency traders are housed, allowing them contact with each other as well as with the major traders worldwide.
Sometimes the bankers go through brokers instead of working directly with traders of other banks. A few major brokers and several minor ones in the United States deal in foreign-exchange transactions. These brokers typically try to link traders of different banks in foreign-exchange transactions. Brokers sometimes work the corporate market as well, but that is rare in comparison with their major area of specialty.
Even though the money center banks trade most of the foreign exchange in the world, companies that are not located in these money centers still can go through regional or local banks for foreign-currency transactions. However, their banks generally work through a money center bank
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