Foreign exchange markets allow participants to exchange one currency for another. One counter party buys specified currency from the other counter party in exchange for another currency. The relative amount of the two currencies is determined by the foreign exchange rate between the 2 currencies. Foreign exchange is traded over-the-counter (OTC), operating worldwide, 24 hours a day.

In the FX market, trades can be executed in variable amounts, dates and denominations. There are no standardized contract sizes or dates.

Ondon is the world’s largest FX trading centre, followed by New York and Singapore. Trading tends to occur in a center during its normal working hours. As a result, trading starts in Asia, then moves to London at the end of the Asian working day and continues in New York at the end of the working day in London.

Fx markets are driven by a number of factors, such as economic fundamentals, the current demand for particular currencies, news events and market sentiment. Many short-term changes in exchange rates are a result of what the market expects to happen to economies or as a result of market sentiment. Dealers may believe that a currency will move in one particular direction based on factors such as:

Dealers act in anticipation of or an actual news of the markets. Rumours too have a powerful effect on the market. It is often the case that the market reacts to a rumour as if it is an established fact – once the rumour is confirmed or denied the market settles down. The way the markets react to rumours is summarized by the phrase: Buy the rumour: sell the fact.

• Gold’s high aboveground stocks, relative to other commodities produced primarily for consumption, highlights gold’s role as a monetary asset.
• Gold’s success as a monetary asset depends on the strength of competing world currencies. Real interest rates, geopolitical risks, and confidence in government are key issues, which define gold’s performance relative to currencies.
• Gold’s more complex fundamentals mean that gold can hedge against a richer set of risks, including risks related to currency instability, which may or may not accompany periods of high inflation.
• The most aggressive case for gold allocations occur when gold rises in terms of all major currencies, indicating gold’s higher relative attractiveness to currencies as a monetary asset.

• The conventional wisdom regarding gold is misplaced. The recent overshadowing of monetary aspects by supply and demand factors has led some market participants to conclude that gold is no longer a monetary asset. Gold still functions as a monetary asset, although it has not fared well against competing currencies in recent history. That gold’s monetary role is currently dormant does not mean that is has permanently ceased. Monetary/non-monetary paradigm remains useful to distinguish gold from other commodity groups. Relative to annual production, gold’s high aboveground stocks (held as a store of value) reinforces its monetary role. Gold cannot simply be lumped together with other investments such as agricultural, energy, food, and livestock products as “commodity investments.”
  
  Gold’s more complex fundamentals mean that gold can hedge against a richer set of risks, including risks related to currency instability that may or may not accompany periods of high inflation. The most aggressive case for gold allocations occur when gold rises in terms of all major currencies, indicating gold’s higher relative attractiveness to currencies as a monetary asset.

Spot traders usually specialize in a specific currency pair such as UDS/CHF, GBP/USD etc. This Means that delivery should take place in 2 business days which is the quickest time that the banks can ‘settle’ the deal giving both parties time to organize settlement details, coping with time differences etc. Although technology has improved the speed with which transactions can take place, the majority of spot deals are still for delivery 2 business days after the trade date, which is known as the value date.

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VALUE DATE
A trade done on a Monday will show a value date on Wednesday:

If a holiday falls in the country of one or both of the currencies involved in the trade, then the spot value date will back one day – in this case to Thursday.

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Spot quotations

Spot quotations are bid (buy) and offer or ask (sell) rates at which a market maker will buy and sell the base currency against another currency.

The table below explains these Spot FX terms used commonly in the market in a little more detail.

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Direct and indirect currency rates