The Foreign Exchange Market

The foreign exchange market is the largest and most liquid financial market in the world with an average daily turnover estimated at $3.98 trillion globally. Of this amount $3.21 Trillion is accounted for in the world’s main financial markets which is broken down as follows:

• $1.005 trillion in spot transactions
• $362 billion in outright forwards
• $1.714 trillion in foreign exchange swaps
• $129 billion estimated gaps in reporting

Due to the size of the market traders include large banks, central banks, currency speculators, corporations, governments, and other financial institutions and the average daily volume is continuously growing.  Volumes grew a further 41% between 2007 and 2008 alone.

Of the $3.98 trillion daily global turnover, 34.1% of the total was trading in London accounted which is around $1.36 trillion making London by far the global center for foreign exchange. In second and third places respectively, trading in New York City accounted for 16.6%, and Tokyo accounted for 6.0%. In addition to “traditional” turnover, $2.1 trillion was traded in derivatives.

Exchange-traded FX futures contracts were introduced in 1972 at the Chicago Mercantile Exchange and are actively traded relative to most other futures contracts.

Several other developed countries also permit the trading of FX derivative products (like currency futures and options on currency futures) on their exchanges. All these developed countries already have fully convertible capital accounts. Most emerging countries do not permit FX derivative products on their exchanges in view of prevalent controls on the capital accounts. However, a few select emerging countries (e.g., Korea, South Africa, India have already successfully experimented with the currency futures exchanges, despite having some controls on the capital account.

FX futures volume has grown rapidly in recent years, and accounts for about 7% of the total foreign exchange market volume, according to The Wall Street Journal Europe.

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