Motivation

Since the 1970s, a series of significant changes has taken place in the world of finance. One key year was 1973, when currencies began to be traded in financial markets and their values determined by the foreign exchange market, a financial market active 24 hours a day all over the world. During that same year, Black and Scholes [18] published the first paper that presented a rational option-pricing formula.

Since that time, the volume of foreign exchange trading has been growing at an impressive rate. The transaction volume in 1995 was 80 times what it was in 1973. An even more impressive growth has taken place in the field of derivative products. The total value of financial derivative market contracts issued in 1996 was 35 trillion US dollars. Contracts totaling approximately 25 trillion USD were negotiated in the over-the-counter market (i.e., directly between firms or financial institutions), and the rest (approximately 10 trillion USD) in specialized exchanges that deal only in derivative contracts. Today, financial markets facilitate the trading of huge amounts of money, assets, and goods in a competitive global environment.

A second revolution began in the 1980s when electronic trading, already a part of the environment of the major stock exchanges, was adapted to the foreign exchange market. The electronic storing of data relating to financial contracts – or to prices at which traders are willing to buy (bid quotes) or sell (ask quotes) a financial asset – was put in place at about the same time that electronic trading became widespread. One result is that today a huge amount of electronically stored financial data is readily available.