4.      Which are the main foreign exchange markets in the world?

Currently there are about 30 main foreign exchange markets around the world, which are distributed in different countries and areas of the continents. Based on the traditional region division, they can be divided into Aisa and Pacific Regions, European and North America, among which the most important ones are London, Frankfurt, Zurich and Paris in Europe, New York and Los Angeles in North America, Sydney, Tokyo, Singapore and Hong Kong, etc in Asia and Pacific Regions.

Every market has its own fixed and special features, but all of them share some common features. These markets, being separated by distance and time, influence sensitively each other while being independent. A center delivers order forms to other centers after business hours every day, which sometimes fixed a keynote for the next opening trading. These foreign exchange markets take the city where it is as its center and radiate to other countries and districts around it. As the markets are in different time zones, having differ business hours and they are linked by advanced telecom equipments and computer network. Market participants can do trading in different places of the world; the foreign exchange capital flows smoothly with exchange rate difference is tiny among the markets, forming a uniform international foreign exchange market with a globalized 24-hour operation. Its situation is stated in the table below.

5.  Which is the largest foreign exchange market of Asia?

Tokyo is the largest foreign exchange transaction center in Asia. Before the 1960s, strict finance supervision was carried out in Japan. In 1964, Japan joined the International Monetary Fund (IMF), and free exchange of JPY was allowed and Tokyo Foreign Exchange Market started to grow. After 1980s, with the rapid and big development in Japanese economy and its gradual status uplifting in international trade, Tokyo Foreign Exchange Market grew up gradually.

From 1990s, influenced by the collapse of Japanese bubble economy, Tokyo Foreign Exchange Market transaction had been in downturn. The transaction in Tokyo Foreign Exchange Market was mainly USD against JPY. Japan is a big trading company, trading requirements of importers and exporters have a considerable influence on exchange rate fluctuation in Tokyo Foreign Exchange Market. As exchange rates changes is closely related to Japanese trading situation, Japanese Central Bank pays great attention to the exchange rate fluctuation of USD against JPY and interferes the Foreign Exchange Market. This is an important feature of Tokyo Foreign Exchange Market.   

6.  Where is the largest foreign exchange transaction center?

It is in London. As the most centuries-old international financial center, London Foreign Exchange Market was the first formed and developed in the world. As early as before World War 1, London Foreign Exchange Market had taken shape. In October 1979, foreign exchange control was eliminated in Britain and London Foreign Exchange Market was developed swiftly. In London financial city over 600 banks gather and nearly all international banks have their branches there. This greatly activated London market transaction. As London has special geographical position, being at the junction of two time zones and connecting Asia markets and North America markets. When Asian markets are near closing time, London Market is just opening time; when Asian markets are near closing time, a new working day begins at New York. Therefore, during these periods, output and input is rather active. That London being the largest foreign exchange transaction center in the world has great influence on the entire foreign exchange market trend.    

7.  Which is the most active foreign exchange market in North America?

It is in New York. After World War 2, with US dollar becoming the international reserve and clearing currency, New York had become the clearing center of US dollar around the world. New York Foreign Exchange Market was quickly developed into a completely open market and the second largest foreign exchange transaction center in the world. Presently over 90% of worldwide US dollar receipt and payment is realized through the New York “Interbank Payment System”, therefore New York Foreign Exchange Market has irreplaceable US dollar clearing and transferring functions compared with those of the other foreign exchange markets. Thus its status has been reinforced day by day. Meanwhile, the importance of New York Foreign Exchange Market reflects on its important influence on the tendency of exchange rates. The intensity of exchange rate fluctuation on New York Market is no less than that of London Market. There are three main reasons, which are the economic situation of America has a decisive influence on the world, various financial markets prosper in America while stock markets, bond markets and foreign exchange markets are related in interaction and the speculation power led by American investment fund is very active with simulative influence on exchange rates. Therefore, exchange rate changes on New York Market attract special attention of worldwide foreign exchange traders.     

8.  Why Offer price is lower than Ask price?

Offer price refers to the quotation of buying base currency. Ask price refers to the quotation of selling base currency. The price difference between Offer price and Ask price refers to the reward for risk taking. The difference between Offer price and Ask price for Euro, JPY, GBP, CHF is relatively small, while that of those currencies with slow transaction is bigger.

9.  How many representation ways are there for exchange rate in international foreign exchange markets?

Usually there are two ways, which are direct pricing and indirect pricing.

10. What is direct pricing?

Direct pricing is also called price marking, which is a representing method of exchange rate by indicating certain amount of a foreign currency in native currency. Usually, it is expressed as the amount of native currency that is equal to 1 unit or 100 units of foreign currency. The more valuable the native currency is, the less amount of native currency to that a unit of foreign currency changed is and the lower the exchange rate is; on the contrary, the less valuable the native currency is, the more amount of native currency to that a unit of foreign currency changed is and the higher the exchange rate is. In direct pricing, the fluctuation of foreign exchange rates is in negative correlation with the value change of native currency. It means if the native currency is revaluated, the exchange rate falls and if the native currency is devaluated, the exchange rate rises. Most countries adopt direct pricing. Most exchange rates on the markets adopt direct pricing as well, such as USD against JPY, USD against HKD and USD against RMB. 

11. What is indirect pricing?

   Indirect pricing is also called quantity pricing. It is a denoting method of exchange rate through using foreign currencies in denoting a certain amount of native currency. It is usually shown as the amount of foreign currency into which 1 unit or 100 units of a native currency can be changed. The more valuable the native currency is, the more foreign currency into which a unit of the native currency can be changed is and the exchange rate is higher; on the contrary, the less valuable the native currency is, the less foreign currency into which a unit of the native currency can be changed is and the exchange rate is lower. Under indirect pricing, the fluctuation of foreign exchange is in positive correlation with the change of native currency value. That is, when the native currency is revaluated, the exchange rate rises; when the native currency is devalued, the exchange rate falls. Most countries of the Commonwealth of Nations adopted indirect pricing, such as Britain, Australia and New Zealand, etc. Exchanged rates adopting indirect pricing are mainly GBP against USD and AUD against USD, etc.

12. What is cross rate?

   In the international market, there is an exchange rate for almost every currency. The exchange rate between one non-USD currency and another is often cross-calculated through the exchange rates of these two currencies against USD. The cross-calculated exchange rate is called cross rate. A distinct feature of cross rate is that it is related to the exchange rates between two non-USD currencies.

13. What are the methods in exchange rate analysis?

   There are two main methods in exchange rate analysis, which are basic analysis and technical analysis. The basic analysis is for basic elements influencing foreign exchange rates, which mainly include economic development standard of different countries, political situation of the world, districts and different countries and market estimation. Technical analysis is estimating future trend for exchange rates through studying former exchange rates using study methods and means in psychology and statistics, etc.

14. What are the classical theories in studying exchange rate change nowadays?

There are mainly three theories, which are British scholar George Goschen’s Theory of International Indebtedness, Sweden economist Gustav Cassel’s Theory of Purchasing Power Parity and the famous British economist John Maynard Keynes’s Interest Rate Parity Theory. Among them, the Interest Rate Parity Theory and the Theory of Purchasing Power Parity are more influential to the market. What deserves the attention of individual foreign exchange dealings account holders is that there are many premises and presumptions in the above theories, which are more theoretical.

15. What does the Interest Rate Parity Theory explain?

   The Interest Rate Parity Theory put forward by the British economist John Maynard Keynes in 1923 explains the relationship between interest rate level and exchange rate. In short, investors are willing to purchase the currency with high interest rate. Therefore, the exchange rate of that currency will be prompted to rise. The Interest Rate Parity Theory breaks through the categories of traditional balance of international payments and price level and exchange rate change from the angle of capital flow is studied, laying the foundation of modern exchange rate theories.

16. What is the Theory of Purchasing Power Parity?

   The Theory of Purchasing Power Parity is a western exchange rate theory. The exchange rate between two country currencies is decided by the contrast relationship between domestic purchasing power of them. If a hamburger is sold at GBP1 in Britain, while the same hamburger is sold at USD 1.70, then the exchange rate is GBP 1 for USD1.70.

   Although The Theory of Purchasing Power Parity is imperfect, the central bank still plays an important role in calculating basic ratio of common commodities. Because by comparing the basic exchange rate calculated based on purchasing power and the market price, departure degree of market exchange rate from the basic exchange rate can be judged. This is an important method in estimating long-term exchange rate.

17.      What is the fundamental reason in deciding the trend of foreign exchange?

Though the fluctuation of foreign exchange rates is daedal, as the other commodities, it is basically determined by the relationship between supply and demand. In international foreign exchange market, when buyers of a currency are more than sellers, buyers compete in purchasing so that buying power is stronger than selling power. As sellers are in demand, the price must rise. On the contrary, when sellers find that their currency is in low demand, they compete in selling some currency. When the selling power keeps the weather, the exchange rate must fall.