How does interbank foreign exchange trading work? What is being traded in the interbank part of the foreign exchange markets? What functions does it serve?
What will be an ideal response?
POSSIBLE RESPONSE: A little more than 40 percent of foreign exchange trading is among banks themselves. Demand deposits denominated in different currencies are being traded where each deal is between a foreign exchange trader at one bank and a trader at a different bank, not a trade with an "outside" customer. Quoted interbank rates are for amounts of $1 million or more. Interbank trading serves several functions. Participation in the interbank part of the market provides a bank with continuous stream of information on conditions in the foreign exchange market. Interbank trading allows the bank to readjust its position quickly and at a low cost. It allows the bank to take on a speculative position quickly.
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