Foreign Exchange: Spot Market
The spot FX market:
is an exchange of one currency against another at an agreed rate.Settlement takes place two days
after the trade date,although there is an exception to the rule.
(most spot trades settle on a T+2 basis,that is,settlement occurs after two working days.)
(T+1 is a notable exception to the T+2 value date convention.This comes into play when Canadian dollar(CAD)
is traded against the US dollar(USD).This one-day USD/CAD spot is known in the market as funds.
1 a spot FX trasaction
2 the size of the spot market
components of spot quote:
1 bid and offer rate
2 base and quoted currency
3 cross rates
4 market maker and market taker
5 mathods of quoting exchange rates
Spot Quotations
A spot rate is the price of one currency against another expressed as a ratio.It consists of two prats:one is
the market maker's buying rate and the other is the selling rate.Market maker quote both the bid and offer
prices in the market,that is,a two-way price.the difference between the buying and selling rate is called the
spread.
Spot rate = buying rate/selling rate
Cross Rates:i.e In the EUR/JPY cross rate, the base currency in the currency pair is EUR.A market maker will
therefore buy EUR against JPY ate the bid rate,and sell EUR against JPY at the offer rate.
Market Maker vs. Market Taker