3.2. MAJOR MARKETS FOR FOREIGN EXCHANGE 91
Table 3.3:Market shares. %, for foreign exchange tradingUK US Japan
Singa-
pore Other
1998 32.5 17.9 6.9 7.1 35.6
2001 31.2 15.7 9.1 6.2 37.8
2004 31.3 19.2 8.3 5.2 36.0
2007 34.1 16.6 6.0 5.8 37.5SourceBIS,Triennal Central Bank Survey of Foreign Exchange and Derivatives Market Activity
in April 2007, Preliminary global results, September 2007.
this spot rate bySt, withtreferring to current time. In practice, “quasi-immediate”
means “right now” only when you buy or sell notes or coins. (This section of the
market is marginal.) For electronic money (that is, money that will be at your
disposal in some bank account), delivery is in two working days for most currencies
(“t+ 2”), and one day between Canada and theusor between Mexico and theus
(“t+ 1”). Thus, if you buyaud2m today, ataud/eur2, theaud2m will be in
your account two working days from now, and theeur1m will likewise be in the
counterpart’s account two days from now. The two-day delay is largely a tradition
from the past, when accounts were kept by hand. The hour of settlement depends
on the country, but tends to be close to noon. Thus, theeurside of aeur/usd
transaction is settled in Europe about six hours before theusd leg of the seal is
settled in NY.^11
Theforwardmarket is the exchange market for payment and delivery of foreign
currency at some future date, say, three months from now. For example, supposing
today is January 3, you could ask your bank to quote you an exchange rate to sell
dollars for pounds for a date in March, say March 5, and the transaction would be
settled on that date in March, at the rate agreed upon on January 3 (irrespective
of the spot rate prevailing on March 5). The forward market, in fact, consists of
as many subsegments as there are delivery dates, and each subsegment has its own
price. We shall denote this forward rate byFt,T, with T referring to the future
delivery date. (Forward rates and their uses will be discussed in great detail in
Chapters 4 and 5.)
The most active forward markets are for 30, 90, 180, 270, and 360 days, but
nowadays bankers routinely quote rates up to ten years forward, and occasionally
even beyond ten years. Note that months are indicated as thirty days. In principle,
30-day contract is settled one month later than a spot contract, and a 180-day for-
(^11) This leads to the risk that, in between the two settlement times, one party may file for
bankruptcy or be declared bankrupt. This is called “Herstatt risk”, after a small German bank
that pulled off this feat on June 26, 1974. Nowadays, regulators close down banksoutsideworking
hours.