New to Forex - Foreign Exchange Market

Foreign Exchange Market: Let us, first of all, understand - what is Foreign Exchange market? Well, exchanging one currency for another currency forms the very existence of Foreign Exchange market. Our world is a cluster of different countries and those countries use different currencies such as Euro, US Dollar, Pound Sterling, Japanese Yen, Swiss Franc, Australian Dollar and many other. These currencies need to be exchanged for various purposes. It is done by selling one currency in order to buy another currency. Thousands and thousands of such transaction being executed 24 hours-a-day, across the globe, collectively create an exciting and dynamic market called "Foreign Exchange Market". Also known as FX, FOREX or Currency market, it is said to be the largest financial market in the world, with estimated daily volumes already exceeding 2 trillion US Dollars ...!!!

Foreign Exchange Rate: It is an indicative current market price quoted for buyer and seller to exchange their currencies at. Two different currencies are paired to effect such an exchange i.e.Euro & US Dollar. An officially quoted Foreign Exchange rate specifies the prevailing worth of one currency in terms of another currency. For example, an exchange rate of 1.35 US Dollar to 1.00 Euro means that if you wish to exchange your US Dollar for Euro, you will have to pay 1.35 US Dollar to purchase one Euro or if you wish to exchange your Euro for US Dollar, you will be receiving little less than 1.35 US Dollar for one Euro. Why less? - because the buying price is always quoted little higher than the selling price, so when you buy, you pay more and when you sell, you get less. This example quote indicates that 1.35 US Dollar is worth the same as 1.00 Euro.

Bid Price and Ask Price: The price you buy at is Bid Price and the price you sell at is Ask Price. A foreign exchange rate quotation is a simultaneous expression of Bid or Buying price and Ask or Selling price. Out of those two prices in the quotation, the higher quoted price is the Bid or Buying price and the lower quoted price is the Ask or Selling price. The seller you are buying from would like to sell to you at a price quoted highest at the time of such transaction so that "Bid" price becomes your Buying price. Similarly, the buyer you are selling to would prefer to buy from you at a price quoted lowest at the time of such transaction so that "Ask" price becomes your Selling price. That is why I say - "When you buy, you pay more and When you sell, you get less!"

Let us understand another example of "EUR/USD=1.3826-1.3828" more specifically. In this case, the currency pair being exchanged is EUR/USD (Euro/US Dollar) and their prevailing exchange rate is indicatively quoted at "1.3826-1.3828" level. What does it mean? - it means that the current exchange rate for EUR/USD currency pair is 1.3826-1.3828. Further, it also means that if you wish to purchase one unit of Euro, you will have to pay the higher quoted price - 1.3828 US Dollar or if you wish to sell one unit of Euro, you will receive the lower quoted price - 1.3826 US Dollar. Remember - when you buy, you pay more and when you sell, you get less.

Spot Rate and Forward Rate: Spot exchange rate is the prevailing current market price or "cash" rate at which two currencies can be exchanged. Though an outright exchange of one currency for another currency, spot transaction doesn't require to be settled immediately i.e. delivery and payment not to be made on the "spot". The date on which such a transaction is made between two parties is called the Deal date and the date on which such spot transaction is to be settled is known as the Settlement or Value date. Settlement of a spot transaction is conducted on the second business day after the Deal date, by convention. While the forward exchange rate is quoted and traded today but the deliveries/payments are made on a pre-specified future date.