International Finance: Putting Theory Into Practice

90 CHAPTER 3. SPOT MARKETS FOR FOREIGN CURRENCY

Figure 3.8: Forex turnover, daily, USDb, and market shares of currency
pairs

0

0.5

1

1.5

2

2.5

3

3.5

1989 1992 1995 1998 2001 2004 2007

ForeX

OTC derivatives

USD &

EUR

27%

USD &

JPY

13%

USD &

GBP

12%

USD

other

36%

EUR &

JPY

2%

EUR &

GBP

2%

EUR &

other

4%

other

pairs

4%

SourceBIS,Triennal Central Bank Survey of Foreign Exchange and Derivatives Market Activity
in April 2007, Preliminary global results, September 2007.

7500 times the world’s official development-aid budget.^10 The major markets were,
in order of importance, London, New York, Tokyo, Frankfurt (the European Central
Bank’s home base). London leads clearly, easily beating even New York, Tokyo, and
Singapore taken together, and still increasing its market share. Frankfurt is a fast
riser but from a low base.

The most important markets, per currency, are theusd/eurand theusd/jpy
markets; together they represent almost half of the world trading volume. Add
in thegbp, and the transactions involving just the top four moneys represent two
thirds of all business. Theusdstill leads: in 88 % of transactions it takes one of
the sides (down from 90 in 2004), while theeuris one of the two currencies in less
than 40% (up from 35) of that volume—and the bulk of that isusd/eurtrade.

3.2.3 Markets by Delivery Date

The exchange market consists of two core segments—the spot exchange market and
the forward exchange market.

Thespotmarket is the exchange market for quasi-immediate payment (in home
currency) and delivery (of foreign currency). For most of this text we shall denote

(^10) All data are from the CIA Factbook—see Google. Trade and aid: 2004; GDP: early 2007
estimates for 2006.