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Chapter 13

Trading in currencies

3.1 The foreign exchange market

The foreign exchange market is an international market in foreign
currencies. It is highly competitive and virtually no difference exists
between the prices in one market (e.g. New York) and another (e.g.
London).

Banks dealing in foreign currency quote two prices for an exchange
rate:

 a lower ‘bid’ price The bank sell low

 a higher ‘offer’ price The bank buys high

3.2 The spot market

The spot market is where you can buy and sell a currency now
(immediate delivery), i.e. the spot rate of exchange is the exchange rate
as of today

3.3 The forward market

The forward market is where you can buy and sell a currency at a fixed
future date for a predetermined rate, by entering into a forward
exchange contract.

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