General information.When you trade with currency you always choose a combination of two currency - for example you would buy American dollar ( USD ) and simultaneously sell Japanese yen ( JPY ) or you buy euro ( EUR ) and sell JPY. On this way the main currency couples are formed and you can trade with them: EUR/USD, USD/JPY, GBP/USD, USD/CHF and so on. For example if you want to open a position in EUR/USD for the amount of 100 000 you will really buy 100 000 euro and simultaneously will sell the definite amount of dollars. This means that you speculate with the possibility of one of the currency to appreciate against the other. The main currency at one cross is always the first currency in the chosen couple.

Spot transactions -The relative values of the world’s currencies affect virtually every financial and economic trend. Business can be battered by foreign competition when the currency soars. Inflation often soars when the domestic currency plunges.According to a survey by the Bank for International Settlements (BIS), every day the equivalent of over USD 1 trillion is converted from one currency to another on the spot foreign exchange market.A spot FX transaction is an exchange of one currency against another at an agreed rate, settlement of which takes place two working days later.
    For example, a spot trade done on Monday will settle on Wednesday, and a spot trade done on Friday will settle on Tuesday. The settlement date is known as the value date.The Canadian dollar (CAD) is the exception. When traded against the US dollar (USD), settlement takes place one working day after the trade date. One day spot USD/CAD is known in the market as funds.
   Components of a Spot Quote.A spot rate is the price of one currency against another expressed as a ratio. It consists of two parts: one is the market maker’s buying rate and the other is the selling rate. The buying rate is the bid. The selling rate is the offer (ask).
   Example: A EUR/USD bid rate is the rate at which the market maker buys euro against the US dollar. Given a bid rate of 0.8842, for each euro received, 0.8842 US dollars must be paid. The last two figures of the bid rate are substituted with the figures pertaining to the offer rate. For example, an offer rate of 47 is an abbreviation of 0.8847. The full quote is 0.8842/47.
The market maker would 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 known as the spread.
   Base Currency vs Quoted Currency. In a FX quote, for example, EUR/USD, the first currency quoted (EUR) is known as the base currency. The second currency (USD) is the quoted currency. In a spot quote, the bid and offer refer to the base currency.The market maker will only quote the last two digits of the bid and offer rate. For example, a EUR/USD quote of 0.8842/47 is quoted orally by the market maker as “forty two, seven.” These are known as the ‘pips’ or ‘points’. The first part of the quote, in this case, 0.88 is not quoted. This is known as the “big figure”.
   Cross RatesFX rates typically involve currencies quoted against the US dollar, for example, EUR/USD, GBP/USD and USD/JPY. However there are other quotes known as cross rates, where neither currency is the US dollar. For example:
EUR/JPY ; EUR/GBP ; EUR/CHF ; GBP/JPY ; CHF/JPY ; GBP/CHF. In the EUR/JPY cross rate, the base currency is EUR (the first currency in the currency pair). Therefore, a market maker will buy EUR (base currency) against JPY at the bid rate and sell EUR (base currency) against JPY at the offer rate.
   Methods of Quoting Exchange Rates. There are two methods of quoting exchange rates:A direct quotation shows a variable amount of domestic currency against a fixed amount of foreign currency. In dealing circles, direct quotes are ones where the US dollar is the base currency, for example, USD/JPY and USD/CHF. An indirect quotation shows a variable amount of foreign currency against a fixed amount of the domestic currency. In dealing circles, indirect quotes are ones where the US dollar is not the base currency, for example, GBP/USD and EUR/USD.

Forward - Except spot forex transactions in the global foreign exchange trading there are also transactions, settlement of which takes place at some fixed or open date in the future. These are so-called Forward transactions. They are used to fix a rate today for a transaction to be settled at some fixed or open date in the future. Thus companies can plan the settlements of their trade operations. These transactions are used mainly for hedging the risk of abrupt movements in the value of a currency pair. Forward rates always move to a level that shows the interest rate divergences.

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