What are the two major segments of the foreign-exchange market? What types of foreign-exchange instruments are traded within these markets?

What will be an ideal response?

The foreign-exchange market has two major segments: the over-the-counter market (OTC) and the exchange-traded market. The OTC market is comprised of banks, both commercial banks and investment banks, as well as other financial institutions, and is where most of the foreign-exchange activity takes place. The exchange-traded market is composed of securities exchanges, such as the Philadelphia Stock Exchange and the Chicago Mercantile Exchange, where certain types of foreign-exchange instruments, such as exchange-traded options and futures, are traded. Several different types of foreign-exchange instruments are traded in these markets, but the traditional foreign-exchange instruments that comprise the bulk of foreign-exchange trading are spot transactions, outright forwards, and FX swaps. Spot transactions involve the exchange of currency the second day after the date on which the two foreign-exchange traders agree to the transaction. The rate at which the transaction is settled is the spot rate. Outright forward transactions involve the exchange of currency three or more days after the date on which the traders agree to the transaction. It is the single purchase or sale of a currency for future delivery. The rate at which the transaction is settled is the forward rate and is a contract rate between the two parties. In an FX swap, one currency is swapped for another on one date and then swapped back on a future date. Although an FX swap is both a spot and a forward transaction, it is accounted for as a single transaction.