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Unit 14: Currency/Forex Market

True, Japanese stocks may benefit from a weaker yen, but they “will not lead the way,” Notes
HSBC said. Japanese bond-market investors, meanwhile, would be caught between
additional buying from the Bank of Japan and the threat of an overly successful reflation,
they said.
– Sarah Turner

Source: http://blogs.marketwatch.com/thetell/2013/02/14/currency-wars-may-boost-forex-market-
trading-hsbc-says/

Self Assessment

Fill in the blanks:

4. Direct quote is simply a currency pair in which the domestic currency is the
…………………… currency.
5. An …………………… quote, is a currency pair where the domestic currency is the quoted
currency.
6. When a currency quote is given without the U.S. dollar as one of its components, this is
called a …………………… currency.
7. When buying a currency pair (going long), the …………………… price refers to the amount
of quoted currency that has to be paid in order to buy one unit of the base currency.
8. The difference between the bid price and the ask price is called a ……………………
9. The …………………… is the smallest amount a price can move in any currency quote.

14.3 History and Market Participants

Given the global nature of the forex market, it is important to first examine and learn some of
the important historical events relating to currencies and currency exchange before entering
any trades. In this section the international monetary system and how it has evolved to its
current state will we reviewed. The major players that occupy the forex market – something that
is important for all potential forex traders to understand will also be discussed.

14.3.1 The History of the Forex: Gold Standard System

The creation of the gold standard monetary system in 1875 marks one of the most important
events in the history of the forex market. Before the gold standard was implemented, countries
would commonly use gold and silver as means of international payment. The main issue with
using gold and silver for payment is that their value is affected by external supply and demand.
For example, the discovery of a new gold mine would drive gold prices down.

The underlying idea behind the gold standard was that governments guaranteed the conversion
of currency into a specific amount of gold, and vice versa. In other words, a currency would be
backed by gold. Obviously, governments needed a fairly substantial gold reserve in order to
meet the demand for exchanges. During the late nineteenth century, all of the major economic
countries had defined an amount of currency to an ounce of gold. Over time, the difference in
price of an ounce of gold between two currencies became the exchange rate for those two
currencies. This represented the first standardized means of currency exchange in history.
The gold standard eventually broke down during the beginning of World War I. Due to the
political tension with Germany, the major European powers felt a need to complete large

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