Foreign Exchange (Spot FX Market)

Three basic FX Transactions

Spot FX Transactions

  • An exchange of currencies in which delivery or settlement usually occurs in 2 business days

Forward Outright Transactions

  • An exchange rate is agreed to buy/sell currencies at a future dates
  • Since 1998, forward FX swaps accounted for more than 60% of total turnover of FX transactions

FX Swaps Transactions

  • Concerned with the combination of a spot deal with a simultaneous forward deal

Value Dates

  • If a holiday falls in the country of one or both of the currencies involved in the trade, then the spot value date will move to the next good business date

Foreign Currency Quotation

Currency pair

  • Spot USD/MYR
  • USD = Base currency or deal currency
  • MYR = Counter currency or non-deal currency

3.82   35   50

  • 82 = Big figure
  • 35 = Bid rate
  • 50 = Offer rate

Indirect quotation

  • When a fixed amount of domestic currency is quoted against a variable amount of foreign currency
  • GBP/USD

Direct Quotation

  • When a fixed amount of foreign currency is quted against a variable amount if domestic currency
  • USD/GBP

Cross rate quotation

  • Expresses one third currency against another third currency
  • GBP/MYR
  • Dollar rates are used in the calculations

Direct and direct

  • Currency 1/USD,   Bid = A1,   Offer = B1
  • Currency 2/USD,   Bid = A2,   Offer = B2
  • C1/C2,   Bid = A1/B2,   Offer = B1/A2
  • C2/C1,   Bid = A2/B1.   Offer = B2/A1

Indirect and indirect

  • USD/Currency 1,   Bid = A1,   Offer = B1
  • USD/Currency 2,   Bid = A2,   Offer = B2
  • C1/C2,   Bid = A2/B1,   B2/A1
  • C2/C1,   Bid = A1/B2,   B1/A2

Direct and indirect

  • Currency 1/USD,   Bid = A1,   Offer = B1
  • USD/ Currency2,   Bid = A2,  Offer = B2
  • C1/C2,   Bid = A1 x A2,   Offer = B1 x B2

Forward Outright Transaction

  • An agreement between two counterparties to exchange two different currencies at a rate which is agreed today for delivery on an agreed future date

Factors Determining Forward Exchange Rates

  • Market sentiments
  • Technical supply and demand
  • Seasonal factors
  • Central bank intervention
  • Interest rate differentials
Comments
2 Responses to “Foreign Exchange (Spot FX Market)”
  1. matt says:

    This blog’s great!! Thanks :).

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