Depending on the volume, nature of foreign exchange transactions and the set of currencies used, these markets are divided into world, regional, national (local).
In the world currency markets (London, Singapore, Paris, Tokyo, etc.), transactions are carried out with currencies that are widely used in international payment circulation, In regional and local foreign exchange markets, banks conduct operations with only a limited number of freely convertible currencies.
National currency markets are understood to mean the entire set of foreign exchange transactions carried out by banks located in the territory of a given country for the foreign exchange service of their customers, including companies, private individuals, and banks. In addition, foreign exchange transactions performed by individual companies among themselves, transactions between private individuals, as well as operations conducted on foreign exchange, can be attributed to operations of the domestic national market.
Currently, thanks to the rapid development of communication technology and the removal of currency restrictions in developed countries, the foreign exchange market has acquired relative technical and organizational integrity on a global scale. The allocation of national, regional, international currency markets has become largely conditional. However, the time difference and the peculiarities of the technology for regulating foreign exchange transactions allow in some cases to talk about the London, Paris and other foreign exchange markets.
As an economic category, the foreign exchange market functions not only in the unity and interaction of its own elements, but also in constant connection with many other economic and political phenomena.
Currency operations are carried out through commercial banks that, on a contractual basis, carry out collection and other payment orders of foreign correspondent banks. The remaining banks and brokerage firms conduct their foreign exchange operations under the supervision of major commercial banks and, as a rule, play a subordinate role. Approximately 95% of foreign exchange transactions carried out in foreign exchange markets are in banks and brokerage firms, which allows characterizing the foreign exchange market as interbank.
Depending on the timing of foreign exchange transactions, foreign exchange markets are divided into:
spot market (cash, current or cash foreign exchange market); urgent foreign exchange market.
The spot market is a market for the immediate delivery of currency. The traditional time period determining the supply of currency in the spot market is 2 business days. Transactions, the execution of which goes beyond 2 business days, are made on an urgent (forward) foreign exchange market.
The global foreign exchange market covers the entire globe. Prices change around the clock in this market, currency is being traded all the time. Leading centers of foreign exchange trade in Europe – Zurich, Frankfurt, Paris, London. In the USA – New York, in Asia – Tokyo, Singapore, Bahrain, Abu Dhabi, Qatar.
World currency trade begins in the morning in Tokyo and Sydney, moves west to Hong Kong and Singapore, passes through Bahrain, shifts to major European markets in Frankfurt, Zurich and London, “jumps” across the Atlantic Ocean to New York and ends in San Francisco and Los Angeles. The market is characterized by the greatest intensity and liquidity in the first hours of the afternoon of European time, when centers are simultaneously opened in Europe and on the east coast of the United States.
At the end of the day in California, when stockbrokers in Tokyo and Hong Kong begin their operations, the market is the least intense.
National foreign exchange markets serving the movement of cash flows within the country are integrated into the global currency market, where foreign exchange transactions and settlements related to the international movement of goods, services and capital are carried out. The world currency market, which operates around the clock, from Monday to Friday, connects national currency markets together using modern means of communication, such as telephone, telefax, and computer networks.
Quotation between banks in different parts of the world is always possible due to the existence of an electronic system. Therefore, most banks, in addition to domestic market operations, also participate in foreign markets.
Large banks have branches involved in foreign currency trading in several major markets:
European banks – in other European countries, USA, Asia; American banks – in Europe and Asia; Asian banks – in Europe and the USA.
In some countries, such as France, part of foreign exchange operations is carried out in the official operating room by openly offering prices. Existing prices at the time of closing are published as official for a given day.
The behavior of foreign exchange market participants who want to get the maximum gain from a foreign exchange transaction depends on the difference between interest rates in the national and foreign money markets, as well as on expected changes in the exchange rate.
So, if an exporter from Germany who received foreign exchange earnings in the amount of 100 thousand US dollars, which he will need after 6 months, does not expect any changes in the level of the exchange rate, then he will invest the amount received in an American bank if the interest rate in the United States is higher than in Germany, and will exchange US dollars for euros after 6 month. If the interest rate is higher in Germany, the exporter will immediately exchange the amount received in euros and invest them in German assets.
Thus, the general rule for speculative operations in foreign currency is that their profitability depends on, how much the currency will fall in price beyond the difference in interest rates on deposits in national and foreign currencies. However, speculative operations will be profitable only if market participants are correctly able to predict the expected changes in the exchange rate.