Foreign exchange market
The foreign exchange market brings together banks, businesses, investors and other participants trading currency through spot, forward, swap or other arrangements. Quotes identify the currencies, units and bid and offer sides; settlement date and counterparty terms are material. The market operates through multiple venues and dealers rather than one universal exchange. Rates reflect supply and demand and other market conditions, while dealing spreads and settlement or credit risks affect actual transactions. A forward quote is a contract price, not a guaranteed forecast of future spot rates.
Worked example
A UK importer asks a bank for a dollar–sterling quote to pay a US supplier. The bank's quoted side and the invoice amount determine the pounds required; the importer also considers settlement timing and any hedging arrangements.
Common mistake
Selecting a rate without identifying the quote's currency units and dealer side, or treating all currency transactions as settlement on the same date.
Where it appears in your exams
| Qualification | Exam | Relationship | Period |
|---|---|---|---|
| ACCA | AFM | Supporting | September 2026–June 2027 |
| ACCA | FM | Supporting | September 2026–June 2027 |