Different Types of Foreign Exchange Transactions

By | June 1, 2017

A foreign exchange transactions is a contract to buy or sell a quantity of one currency in exchange for another at a specified time for delivery and settlement and at a specified price (exchange rate). These transactions take place in foreign exchange markets. Regarding counterparties and settlement dates, the forex transactions are classified in many categories as trade transactions, interbank transactions, spot transactions and forward transactions.

Various foreign exchange quotations play a major role in the foreign exchange market. These are direct, indirect or cross rates. And can be expressed in European terms or American terms. Direct quotation is the price of one unit of a foreign currency quotation regarding the home country’s currency. The indirect quotation is just the reverse. It is the price of one unit of the home currency quoted regarding foreign currency.  The exchange rate for any non-dollar currencies is then calculated from their respective dollar exchange rates, to derive a cross rate.

Foreign exchange market also has two segments. One is spot market; currencies are traded for settlement after two business days. However, in forward market contracts are made to buy or sell for future deliveries. Unlike a stock market, where all participants have access to the same prices, the forex market is divided into level of access. These participants are commercial banks, brokers, customers, MNCs and central banks.