Development of Trading Activities

The purpose of a bank to buy and sell financial instruments is to obtain short-term profits from market price movements → means the bank at risk for loss if the value of financial instruments are down.

Banks may adopt one of three trading strategies:
1. Matched Book → lowest market risk
Bank to match the customer's position directly on the same amount and opposite positions are traded both internally and with other banks → terhadi at risk only when the deal with customers and transact offset (or is called 'hedging' or 'covering' transactions).
2. Manage product positioning by making appropriate hedging or covering from the trading desk policy.
Trading desk has a limit for market risk limit the risk that belongs to the bank every time. The position can be taken because the transaction because the customer or a trader to take positions in the market. This strategy allows the trader to calculate their position to take advantage of market price movements.
3. Being a 'market maker' for a product.
Traders will give buy and sell prices to customers and other banks and memperdagangkannya at the relevant price level. This strategy is running when the market is illiquid and other market makers with whom a trader can cover the risks. Market makers can benefit from:
→ spreads between buy and sell prices
→ market information obtained from each transaction
Risk in this strategy is that the trader must take a position that can cause harm. So traders have to be disciplined in managing risk and the bank should establish and monitor a suitable limit.
Banks tend to change its strategy if the business grows and there will be more than one strategy used in the product in a bank's trading book. Usually a bank trading activities arising from the desire to provide service to customers. As the development bank's trading activities in the forex market is one of the freely traded market in the world. This comes from the introduction of floating exchange rates in the 1970s, which created new risks for customers who do international business, so they asked the bank to do forex trading for them.

The exchange rate is a retail rate offered to customers including the wholesale margin of the interbank market rate. At the beginning of a very large margin trading, but as banks increase in volume and more confident in their ability to manage their foreign exchange positions, the trading activities of the service changes to be nasbah wholesale trading operation.

The banks with lots of customers and large volume of forex transactions can use the position of 'retail' is to influence short-term movements in the forex market, and can bring opportunity to profit far exceeds the customer's transaction. That's why banks to improve your position on his trading book. When competition increases, margins will drop to the customer, so the volume of trade for the world's major currencies such as USD / EUR, USD / JPY and EUR / GBP currently dominated by interbank trade, while trade is relatively small customer.

The development of foreign exchange is a good illustration of how trade an instrument to grow in a bank.
stage 1: the bank maintains a position of the instrument match the → the bank to do deal with customers and soon to hedge with another bank. Bank profit obtained from the difference between interbank rates and the price customers
stage 2: the bank holding the position of customer transactions, waiting for a short-term market movements are profitable banks. Holding period can be extended if the bank more experienced. Bank's trading activity does not depend anymore on customer activity