Question

The sizes of the US stock market, bond market and international forex market are, approximately, 30 bln, 30 bln and 5.1 trln. JP Morgan operates in all three of them. Would you say that the forex market contributes the most to the bank’s VaR?

Answer 1

The foreign exchange markets is the world's largest financial market to the daily volume of 5.1 trillion dollars.The foreign exchange market is a global marketplace for exchanging national currencies with one another. The market participants uses foreign exchange transactions to hedge against international currency and interest rate risk and it help them to speculate on geopolitical events as well. It helps them to diversify portfolios and it help to hedge currency risk from foreign transactions.

The forex market has whole gambit of players which include commercial and investment banks, Central banks, investment managers and hedge funds and a lot of multinational corporations as well as some individual investors.

Commercial and investment banks are the major player as the greatest volume up in currency is traded in interbank market transactions. Bank facilitate various forex transactions for client and conduct speculative rates from their own trading desk. Banks also act as a dealer for clients and various speculative currency trade are executed. they also provided with diversification to the portfolio mix.

Foreign currency transactions contribute a lot of banks value at risk because foreign currency exchange is the largest Market in the world and there are various types of currency risk associated with various decisions globally undertaken by different governments,like interest rates in higher yielding countries begin to fall back toward low yielding countries. The trade unwinds and investor sell their higher yielding Investment.These kind of squaring off positions may cause large finance institution and investors with sizeable foreign holdings to move money back to other country.This may lit to decrease in global equity prices so the interrelationship are also multifold .

So we can say that the foreign exchange market is integral and the highest traded marketplace for exchanging different national currency.It helps different type of corperation to hedge against currency risk and speculate on geo political events.