I assume that when you do a mark/yen cross, you price it in dollars, not in terms of one of the two currencies. That's right. You simply say: Buy $100 [million] worth of marks and sell $100 [million] worth of yen. In the
interbank market, the dollar is the unit of exchange all over the world.
In situations where a surprise news development or the release of an economic statistic out of line with expectations causes a sharp price response in currencies, does the interbank market react less vio- lently than the futures market, or do the arbitrageurs keep the two markets tightly linked? The two markets are well arbitraged, but those are the moments when a very swift arbitrageur will make
some money. The markets do get a little bit out of line, but not a lot.
Will the interbank market price response to such events be less extreme? Yes, because what happens on the futures market is that the locals back away and let the stops run. The only
thing that pulls the markets back is the arbitrageurs who have the bank on the other side.
What percentage of bank market trading represents commercial activity, or hedging, vis-a-vis speculative trades? The Fed has done a study on that. I don't have the figures on hand, but it is basically a hedging market. The
banks are the principal speculators, as well as a few players like myself.
Is there a reason why the futures market hasn't been able to capture a larger percentage of world currency trading? The currency futures market is not efficient in several of the most important respects. First, hedging usually
has a specific dollar and date requirement. For example, if I need to hedge $3.6 million for April 12, the bank just
takes it. The futures market, however, trades only for specific dates and fixed contract sizes, so the hedger is not
precisely covered.
So actually there is no way the futures market can compete, because the interbank market can
