ABSTRACT
The spot, swap and outright forward exchange markets together form what may be described as a 'market triangle'. One common example of a market triangle is provided by the spot markets in foreign exchange. The manager of the Foreign Exchange Department takes the most actively traded currency, the US dollar, as the reference point for measuring outstanding inventory positions across exchange markets involving many different currency pairs. Given the direction of inventory imbalance, both the mark/dollar and franc/dollar rates should be raised, in order to reduce the absolute size of dollar inventory. Satellite creation of exchange rate quotes between two non-dollar currencies is most likely where the exchange rate between them is fairly volatile and where both currencies are traded much more actively against the US dollar than against any other. The substantial interdependence of market-making in different currency pairs places the multinational bank with customer business in many markets at an advantage in the foreign exchange market.
