These entail all transactions involving the exchange of two currencies.

The world currency market is extremely active: This is an over-the-counter market directed by banks and brokers. Market participants always quote currencies in price intervals: The lower price figure represents the trader's buy price: In light of the fact that all market players are familiar with the current price and that it changes too fast, only the last two figures are quoted. These are called pips.

Pips are the last figure after the decimal point in a quote. Ccy1 is thus the traded currency and Ccy2 the price currency. The way of expressing the rate is a convention relating to the relative trading priority of currencies. A "direct quote" expresses the quantity of the other currency that you will receive for one unit of the base currency. The euro quotes directly against all other currencies.

The US dollar quotes directly against all other currencies… except the euro. Rates are posted on the market for the most actively traded currencies: For currency pairs typically not listed on the market, the trade goes through an intermediary of one of the two currencies in order to obtain a cross rate.

Spot market - Wikipedia

Forward or outright currency trading entails a swap between two currencies at a negotiated date value date and exchange rate. This type of contract enables traders to set an exchange rate between two currencies in the future and thus hedge against currency risk. The characteristics of a forward currency transaction are defined in relation to a benchmark spot rate for the day's trading.

When the forward rate is above the spot rate, the currency is said to be in contango; when the spot rate is above the forward rate, it is in backwardation. But how is a forward rate determined? Forward rates are not listed on the market. These are the rates that are used to calculate forward rates. From the viewpoint of the trader quoting the transaction, the forward currency transaction entails three operations:. The graph below illustrates the logic of a forward purchase of currency C1 for C2.

Bear in mind that the dotted lines do not represent real cash flows but are only used to illustrate transaction logic. Only the cash flows at value date lines are the real cash flows of the transaction. He would have to lend amount A' 1 today for the payback from the imaginary loan of C 1 to equal this amount A Likewise, Amount A 2 at maturity date corresponds to a borrowed amount today A' 2 such that:.

This is a bit complicated but once the formula is input into the Excel program, we don't have to think about it anymore! This means that the forward price is not an anticipated future spot rate, despite what we might think. It is nonetheless based on a currency evaluation via market rates.

The contango or backwardation, defined above, depend on the level of currency interest rates. When the forward exchange rate is such that a forward trade costs more than a spot trade today costs, there is said to be a forward premium.

If the reverse were true, such that the forward trade were cheaper than a spot trade then there would be a forward discount.

A forex swap consists of two legs: These two legs are executed simultaneously for the same quantity, and therefore offset each other. A forex swap enables an investor to obtain currencies immediately and then sell them at a price agreed upon in the contract at swap maturity date. For example, a client possessing money denominated in euros wishing to investment in US 3-month T-bills buys dollars today to pay for the purchase.

He then sells them at maturity at a known price. In comparison with a forward currency contract, the monies exchanged involve the money actually loaned by the trader and bought on a forward basis and the actual borrowing of the sold currency.

The forward rate is calculated in the same way. The far leg has the characteristics of a forward contract which are deduced from the spot exchange:. The forex market is an OTC market, driven by banks and brokers. Beside telephone, electronic trading platforms such as Reuters Dealing and EBS Electronic Broking Service are popular among traders. Trades can be made in conversation mode: Otherwise the platforms match up the proposals made by participants: The Front office system records the deals in real time.

Deals negotiated by telephone are registered by the trader while those made via electronic platforms are transmitted automatically. The graph below illustrates the information flow between two banks and their correspondent banks when Bank A sells Currency 1 in exchange for Currency 2 from Bank B:.

See the education pages of the realtime forex website. With climate change, finance just as other economic sectors has no choice but to become sustainable.

Foreign exchange spot - Wikipedia

But using which tools? The blockchain is the underlying technology behind bitcoin. How does it work?

Why is it a potential revolution, especially in finance? Forex transactions These entail all transactions involving the exchange of two currencies. The main characteristics of a spot transaction include: The main currency The direction: Currency sold, if it is a purchase, or currency bought if it is a sale.

The trade date The spot date: A spot currency contract has no lifespan; there is no end date. The agreed-upon amount is expressed in the main currency The trade price The amount in the secondary currency whose calculation is based on the amount of the main currency and the exchange rate Characteristics common to all market transactions: The orderbook and perhaps the trader's identity The counterparty Possibly the broker through whom the trade was made Settlement instructions: Rates Market participants always quote currencies in price intervals: Cross rates Rates are posted on the market for the most actively traded currencies: Forward or Outright exchange Forward or outright currency trading entails a swap between two currencies at a negotiated date value date and exchange rate.

Calculation of forward rates Forward rates are not listed on the market. From the viewpoint of the trader quoting the transaction, the forward currency transaction entails three operations: A spot transaction running in the same direction as the forward. A loan of the currency bought on the same terms as the forward transaction the loan pay-back incoming cash flow coinciding with the forward purchase.

A borrowing of the currency sold pay-back flow coinciding with the forward sale. Let's assume that the trader quotes the deal on the basis of the following rates: The trader must quote a forward purchase of amount A 1 of currency C 1. He would have to lend amount A' 1 today for the payback from the imaginary loan of C 1 to equal this amount A 1: Where N is the loan's life in days.

Likewise, Amount A 2 at maturity date corresponds to a borrowed amount today A' 2 such that: Equally for a forward sale: This calculation applies only to periods of less than one year. Other calculation methods exist, depending on the currencies.

Characteristics of a forward exchange The characteristics of forward currency transaction are thus: Characteristics common to all market transactions: The book and perhaps the trader's identity Counterparty Perhaps a broker or other intermediary Settlement instructions: Forex swap A forex swap consists of two legs: The characteristics of a forex swap include: The short leg has the characteristics of a spot exchange: The currency bought is the currency sold of the short leg The currency sold is the currency bought of the short leg Amount expressed in the main currency is identical The value date is the date at which the reciprocal exchange will be made.

Front-to-back processing of a currency transaction Trading The forex market is an OTC market, driven by banks and brokers. Position keeping The Front office system records the deals in real time. The position holding system offers basic but minimum features such as: Pricing as seen above Manual or automatic deal recording Deal validation Risk control: Back office The back office system acts to materialise transactions made by the trader: This makes it possible to detect errors or miscommunications before launching payments.

The graph below illustrates the information flow between two banks and their correspondent banks when Bank A sells Currency 1 in exchange for Currency 2 from Bank B: Currency deals are recorded off-balance sheet accrual accounting for the period between the trade and the value dates. At the value date, the off-balance sheet accounting item is reversed and the deals are recorded on the bank's balance sheet. Currency transactions add to the accounts that are not denominated in the bank's balance sheet currency.

The positions held add to the currency position accounts the daily revaluation of which triggers re-measurement of the bank's currency risk. On the Web See the education pages of the realtime forex website. Translated from French by Valdere Translations , Financial translation specialist.