ABSTRACT
According to Einzig, Vienna was the first important market-place in forward exchange. The gulden-mark exchange market was one of the most active in the world of the 1870s and 1880s, given the very substantial trade links between the German and Austro-Hungarian empires. The birth of offshore deposit markets in the 1960s and the generalised floating of currencies after 1973 brought important changes to forward exchange markets. There are three types of contracts traded in exchange markets — spot, outright forward and swap. Spot exchange contracts expose the parties to both credit and political risks. Swap dealing is very common in exchange markets and there is a much greater volume of swap than of outright forward transactions. Most banks do not market-make in foreign exchange but act simply as brokers for their commercial customers. During periods of heightened volatility in the foreign exchange markets, banks are likely to lower inventory limits and raise their spreads between bid and offer rates.
