The foreign exchange (FX) market is an international marketplace for trading currencies. In FX transactions, one currency (sometimes shortened to CCY) is exchanged for another. Currencies are denoted with a three-letter code and currency pairs are written CCY1/CCY2 where the exchange rate for the currency pair is the number of CCY2 it costs to buy one CCY1. Therefore, trading EUR/USD FX involves exchanging amounts of EUR and USD. If the FX rate goes higher, CCY1 is getting relatively stronger against CCY2 since it will cost more CCY2 to buy one CCY1. If the FX rate goes lower, CCY1 is getting relatively weaker against CCY2 because one CCY1 will buy fewer CCY2.
If a currency pair has both elements from the list in Exhibit 1.1, it is described as a G10 currency pair.
Exhibit 1.1 G10 Currencies
|CCY Code||Full Name||CCY Code||Full Name|
|AUD||Australian dollar||JPY||Japanese yen|
|CAD||Canadian dollar||NOK||Norwegian krone|
|CHF||Swiss franc||NZD||New Zealand dollar|
|GBP||Great British pound||USD||United States dollar|
The most commonly quoted FX rate is the spot rate, often just called spot. For example, if the EUR/USD spot rate is 1.3105, EUR 1,000,000 would be exchanged for USD 1,310,500. Within a spot transaction the two cash flows actually hit the bank account (settle) on the spot date, which is usually two business days after the transaction is agreed (called T+2 settlement). However, in some currency pairs, for ...