Page 283 - DCOM507_STOCK_MARKET_OPERATIONS

Stock Market Operations

Notes
Table 14.1: Currency Quote Overview
USD/CAD = 1.2232/37
Base Currency Currency to the left (USD)
Quote/Counter Currency Currency to the right
(CAD)
Bid Price 1.2232 Price for which the market
maker will buy the base
currency. Bid is always
smaller than ask.
Ask Price 1.2237 Price for which the market
maker will sell the base
currency.
Pip One point move, in The pip/point is the
USD/CAD it is .0001 and 1 smallest movement a price
point change would be can make.
from 1.2231 to 1.2232
Spread Spread in this case is 5
pips/points; difference
between bid and ask price
(1.2237-1.2232).

14.2.2 Currency Pairs in the Forwards and Futures Markets

One of the key technical differences between the forex markets is the way currencies are quoted.
In the forwards or futures markets, foreign exchange always is quoted against the U.S. dollar.
This means that pricing is done in terms of how many U.S. dollars are needed to buy one unit of
the other currency. Remember that in the spot market some currencies are quoted against the
U.S. dollar, while for others, the U.S. dollar is being quoted against them. As such, the forwards/
futures market and the spot market quotes will not always be parallel one another.

Example: For example, in the spot market, the British pound is quoted against the U.S.
dollar as GBP/USD. This is the same way it would be quoted in the forwards and futures
markets. Thus, when the British pound strengthens against the U.S. dollar in the spot market, it
will also rise in the forwards and futures markets.
On the other hand, when looking at the exchange rate for the U.S. dollar and the Japanese yen,
the former is quoted against the latter. In the spot market, the quote would be 115 for example,
which means that one U.S. dollar would buy 115 Japanese yen. In the futures market, it would be
quoted as (1/115) or .0087, which means that 1 Japanese yen would buy .0087 U.S. dollars. As
such, a rise in the USD/JPY spot rate would equate to a decline in the JPY futures rate because the
U.S. dollar would have strengthened against the Japanese yen and therefore one Japanese yen
would buy less U.S. dollars.

The Good and the Bad
We already have mentioned that factors such as the size, volatility and global structure of the
forex market have all contributed to its rapid success. Given the highly liquid nature of this
market, investors are able to place extremely large trades without affecting any given exchange
rate. These large positions are made available to traders because of the low margin requirements

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