Forex glossary of terms
The most common foreign currency contract is what is knowns as a spot contract. A spot contract is price of any currency at any exact time. The price at the time of the agreement stays the same despite the fact that it takes two days for the transaction to clear. Upon receiving some notification that the funds have cleared (usually BACS or CHAPS) the currency can be delivered almost immediately. This is typically done via Electronic Fund Transfer.
The most common contracts in the foreign exchange market are Spot contracts and forward contracts. These contracts are accords between financial institutions and market players which detail the conditions of exchange between any two currencies. There are many details which need to be settled in all foreign exchange contracts. These include:
- Specifying the currency which is being bought as well as the currency that is being sold
- The amount of each currency which is slated to be bought and sold
- The maturation or expiration date of the foreign exchange contract
- The rate at which the two currencies will be swapped.
In a foreign exchange spot contract, an agreed upon transaction will be in accordance with the agreed upon exchange rate, however the payments will not be retrievable until two days following the agreement.
In other words, following a foreign exchange spot contract, the currency being bought will be available two days following the agreement, and of course the currency which is sold will be paid two days following the agreement. This is standard and applies to the exchanging of all major currencies.
Several key differences exist between spot contracts and forward contracts. Yet there are also similarities. All forex contracts including spot and forwards, are contracts which allow the participants to buy or sell some currency at an agreed upon rate in exchange for a different currency at some specific date. The date of sale can be one that is set to occur sometime in the future. Deals such as these are known as a forward deals. Although these transactions can occur far into the future usually forward transactions are not made a year in advance. Agreements that will be implemented five years into the future almost never occur.
Spot transactions differ from futures in that their date is more linked to the present. to review, a spot deal is a contract to buy or sell some currency in exchange for a different one at the current exchange rate. The date at which this will occur usually happens within two business days of the original agreement. People in Forex often talk about the bid. The bid is the price any forex dealer will agree to pay for some currency. The ask is the price at which currency is being sold. A spread exists between the bid and the ask price. This is the amount in which the ask price is higher than the bid price. A large spread between the two usually is indicative of an unstable exchange rate.
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