Dealing in Forex Market

Dealing in Forex Market

The transactions on exchange markets are carried out among banks. Rates are quoted round the clock. Every few seconds, quotations are updated. Quotations start in the dealing room of Australia and Japan (Tokyo) and they pass on to the markets of Hong Kong, Singapore, Bahrain, Frankfurt, Zurich, Paris, London, New York, San Francisco and Los Angeles, before restarting.

            In terms of convertibility, there are mainly three kinds of currencies. The first kind is fully convertible in that it can be freely converted into other currencies; the second kind is only partly convertible for non-residents, while the third kind is not convertible at all. The last holds true for currencies of a large number of developing countries.

            It is the convertible currencies, which are mainly quoted on the foreign exchange markets. The most traded currencies are US dollar, Deutschmark, Japanese Yen, Pound Sterling, Swiss franc, French franc and Canadian dollar. Currencies of devel­oping countries such as India are not yet in much demand internationally. The rates of such currencies are quoted but their traded volumes are insignificant.

            As regards the counterparties, gives a typical dis­tribution of different agents involved in the process of buying or selling. It is clear, the maximum buying or selling is done through exchange brokers.

            The composition of transactions in terms of different instru­ments varies with time. Spot transactions remain to be the most important in terms of volume. Next come Swaps, For­wards, Options and Futures in that order.

DEALING ROOM

All the professionals who deal in Currencies, Options, Futures and Swaps assemble in the Dealing Room. This is the forum where all transactions related to foreign exchange in a bank are carried out. There are several reasons for concentrating the entire information and communication system in a single room. It is necessary for the dealers to have instant access to the rates quoted at different places and to be able to communicate amongst themselves, as well as to know the limits of each counterparty etc. This enables them to make arbitrage gains, whenever possible. The dealing room chief manages and co­-ordinates all the activities and acts as linkpin between dealers and higher management.

THE DEALING ARENA

            The range of products available in the FX market has increased dramatically over the last 30 years. Dealers at banks provide these products for their clients to allow them to invest, speculate or hedge.

            The complex nature of these products , combined with huge volumes of money that are being traded, mean banks must have three important functions set up in order to record and monitor effectively their trades.

4.4.3 THE FRONT OFFICE AND THE BACK OFFICE

            It would be appropriate to know the other two terms used in connection with dealing rooms. These are Front Office and Back Office. The dealers who work directly in the market and are located in the Dealing Rooms of big banks constitute the Front Office. They meet the clients regularly and advise them regarding the strategy to be adopted with regard to their treas­ury management. The role of the Front Office is to make profit from the operations on currencies. The role of dealers is two­fold: to manage the positions of clients and to quote bid-ask rates without knowing whether a client is a buyer or seller. Dealers should be ready to buy or sell as per the wishes of the clients and make profit for the bank. They should take into account the position that the bank has already taken, and the effect that a particular operation might have on that position. They also need to consider the limits fixed by the Management of the bank with respect to each single operation or single counterparty or position in a particular currency. Dealers are judged on the basis of their profitability.

            The operations of front office are divided into several units. There can be sections for money markets and interest rate operations, for spot rate transactions, for forward market trans­actions, for currency options, for dealing in futures and so on. Each transaction involves determination of amount exchanged, fixation of an exchange rate, indication of the date of settle­ment and instructions regarding delivery.

           

            The Back Office consists of a group of persons who work, so to say, behind the Front Office. Their activities include manag­ing of the information system, accounting, control, administra­tion, and follow-up of the operations of Front Office. The Back Office helps the Front Office so that the latter is rid of jobs other than the operations on market. It should conceive of better information and control system relating to financial operations. It ensures, in a way, an effective financial and man­agement control of market operations. In principle, the Front Office and Back Office should function in a symbiotic manner, on equal footing.

            All the professionals who deal in Currencies, Options, Futures and Swaps assemble in the Dealing Room. This is the forum where all transactions related to foreign exchange in a bank are carried out. There are several reasons for concentrating the entire information and communication system in a single room. It is necessary for the dealers to have instant access to the rates quoted at different places and to be able to communicate amongst themselves, as well as to know the limits of each counterparty etc. This enables them to make arbitrage gains, whenever possible. The dealing room chief manages and co­-ordinates all the activities and acts as linkpin between dealers and higher management.