The interbank market is the top-level
foreign exchange market
The foreign exchange market (forex, FX, or currency market) is a global decentralized or over-the-counter (OTC) market for the trading of currencies. This market determines foreign exchange rates for every currency. By trading volume, ...
where banks exchange different currencies.
The banks can either deal with one another directly, or through electronic brokering platforms. The
Electronic Broking Services (EBS) and
Thomson Reuters
Thomson Reuters Corporation ( ) is a Canadian multinational corporation, multinational content-driven technology Conglomerate (company), conglomerate. The company was founded in Toronto, Ontario, Canada, and maintains its headquarters at 1 ...
Dealing are the two competitors in the electronic brokering platform business and together connect over 1000 banks.
The currencies of most developed countries have floating exchange rates. These currencies do not have fixed values but, rather, values that fluctuate relative to other currencies.
The interbank market is an important segment of the foreign exchange market. It is a wholesale market through which most currency transactions are channeled. It is mainly used for trading among bankers. The three main constituents of the interbank market are:
* the
spot market
The spot market or cash market is a public financial market in which financial instruments or commodities are traded for immediate delivery. It contrasts with a futures market, in which delivery is due at a later date. In a spot market, s ...
* the
forward market
The forward market is the informal over-the-counter financial market by which contracts for future delivery are entered into. It is mainly used for trading in foreign currencies, where the contracts are used to hedge against foreign exchange r ...
*
SWIFT
Swift or SWIFT most commonly refers to:
* SWIFT, an international organization facilitating transactions between banks
** SWIFT code
* Swift (programming language)
* Swift (bird), a family of birds
It may also refer to:
Organizations
* SWIF ...
(Society for World-Wide Interbank Financial Telecommunications)
The interbank market is unregulated and decentralized. There is no specific location or exchange where these currency transactions take place. However,
foreign currency options are regulated in a number of countries and trade on a number of different
derivatives exchange
A futures exchange or futures market is a central financial exchange where people can trade standardized futures contracts defined by the exchange. Futures contracts are derivatives contracts to buy or sell specific quantities of a commodity or ...
s. In many countries the
central bank
A central bank, reserve bank, national bank, or monetary authority is an institution that manages the monetary policy of a country or monetary union. In contrast to a commercial bank, a central bank possesses a monopoly on increasing the mo ...
publishes closing
spot price
In finance, a spot contract, spot transaction, or simply spot, is a contract of buying or selling a commodity, security or currency for immediate settlement (payment and delivery) on the spot date, which is normally two business days after t ...
s each trading day.
Market makers
Unlike the stock market, the foreign currency exchange market (
Forex
The foreign exchange market (forex, FX, or currency market) is a global decentralization, decentralized or Over-the-counter (finance), over-the-counter (OTC) Market (economics), market for the trading of currency, currencies. This market det ...
) does not have a physical central exchange like the
NYSE
The New York Stock Exchange (NYSE, nicknamed "The Big Board") is an American stock exchange in the Financial District, Manhattan, Financial District of Lower Manhattan in New York City. It is the List of stock exchanges, largest stock excha ...
.
Without a central exchange, currency exchange rates are made, or set, by
market maker
A market maker or liquidity provider is a company or an individual that quotes both a buy and a sell price in a tradable asset held in inventory, hoping to make a profit on the difference, which is called the ''bid–ask spread'' or ''turn.'' Thi ...
s.
Banks constantly quote a bid and an ask price based on anticipated currency movements taking place and thereby make the market. Major banks handle very large forex transactions, often in billions of units.
These transactions cause the primary movement of currency prices in the short term.
Other factors contribute to currency exchange rates: these include forex transactions made by smaller banks,
hedge fund
A hedge fund is a Pooling (resource management), pooled investment fund that holds Market liquidity, liquid assets and that makes use of complex trader (finance), trading and risk management techniques to aim to improve investment performance and ...
s, companies, forex brokers and traders. Companies are involved in forex transactions due to their need to pay for products and services supplied from other countries which use a different currency. Forex traders on the other hand use forex transaction, of a much smaller volume with comparison to banks, to benefit from anticipated currency movements by buying cheap and selling at a higher price or vice versa. This is done through forex brokers who act as a mediator between a pool of traders and also between themselves and banks.
Central bank
A central bank, reserve bank, national bank, or monetary authority is an institution that manages the monetary policy of a country or monetary union. In contrast to a commercial bank, a central bank possesses a monopoly on increasing the mo ...
s also play a role in setting currency exchange rates by altering interest rates. By increasing interest rates they stimulate traders to buy their currency as it provides a high return on investment and this drives the value of the corresponding central bank's currency higher in comparison to other currencies.
See also
*
Interbank lending market
The interbank lending market is a market in which banks lend funds to one another for a specified term. Most interbank loans are for maturities of one week or less, the majority being overnight. Such loans are made at the interbank rate (also cal ...
References
External links
Interbank Market: Transmission of monetary policy
{{Authority control
Foreign exchange market