Author Question: A convertible currency is traded freely in the foreign exchange market with its price determined by ... (Read 107 times)

jasdeep_brar · **on:** Jul 7, 2018

A convertible currency is traded freely in the foreign exchange market with its price determined by London banks.

Indicate whether the statement is true or false

Question 2

Briefly describe the three main institutions of the foreign exchange market.

What will be an ideal response?

kiamars2010 · **Reply #1 on:** Jul 7, 2018

Answer to Question 1

FALSE

Answer to Question 2

The three main components of the foreign exchange market are the interbank market, securities exchanges, and the over-the-counter market.
It is in the interbank market that the world's largest banks exchange currencies at spot and forward rates. Companies tend to obtain foreign exchange services from the bank where they do most of their business. Banks satisfy client requests for exchange quotes by obtaining quotes from other banks in the interbank market. For transactions that involve commonly exchanged currencies, the largest banks often have sufficient currency on hand. Yet rarely exchanged currencies are not typically kept on hand and may not even be easily obtainable from another bank. In such cases, banks turn to foreign exchange brokers, who maintain vast networks of banks through which they obtain seldom-traded currencies.
In the interbank market, then, banks act as agents for client companies. In addition to locating and exchanging currencies, banks commonly offer advice on trading strategy, supply a variety of currency instruments, and provide other risk-management services. They also help clients manage exchange rate risk by supplying information on rules and regulations around the world.
Securities exchanges specialize in currency futures and options transactions. Buying and selling currencies on these exchanges entails the use of securities brokers, who facilitate transactions by transmitting and executing clients' orders. Transactions on securities exchanges are much smaller than those in the interbank market and vary with each currency.
The over-the-counter (OTC) market is a decentralized exchange encompassing a global computer network of foreign exchange traders and other market participants. All foreign exchange transactions can be performed in the OTC market, where the major players are large financial institutions.