Interbank Trading

In interbank trading, a bank, financial institution or dealer generally acts as principal in the transaction and includes its anticipated profit (the 'spread' between the 'bid' and the 'asked'), and in some instances a transaction charge, in the prices it quotes for such a contract. Interbank market transactions not being of standard size, are subject to individual negotiation between the parties involved. The interbank market is not a formally organised exchange. It is an informal network of trading relationships among world participants, which include primarily central banks, major commercial banks, investment banks, securities brokers and dealers, pension funds, insurance companies, multinational corporations and sophisticated individuals. Virtually all major currencies are traded in the interbank market. The role of banks in this market is particularly important because they maintain active currency trading operations and offer to buy and sell currencies to and from their customers and correspondent banks.

Unlike certain commercial users of the interbank market, the Advisor will engage in trading in the interbank market for speculative purposes with the aim of making a profit from the relative movements of the currencies that are the subject of the transactions. The Advisor might buy and sell two or more different foreign currencies at or about the same time, similar to a spread position, in order to take advantage of potential profits in the price relationship between two currencies.

The interbank market, and participation in it, is not subject to regulation by the United States government or by any international agency.

Spot transactions involve the exchange of one currency for another at a rate specified at the time of contracting, with the settlement date usually being two business days thereafter. Forward transactions differ from spot transactions in that their maturity may be a number of days, months or even years rather than two business days. Again, the exchange rate is fixed at the time of contracting but no accounts are credited or debited until the value or maturity date.

The most efficient way to trade the interbank market for short term trading is not through dealing in forward rates, but through trading spot rates. These spot trades are usually effected as 24 or 48 hour forward transactions which are rolled forward daily. On each daily rollover the one-day interest rate differential between the two currencies in the transaction will be deducted or added to the account as the case may be. This procedure accrues positive or negative interest to the Company's account (until the trade is offset by an opposite transaction) and 'marks to market' - or values - all positions held, according to the closing prices of the respective currencies, allowing daily valuation of the Company's account worth.