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FX SPOT
A spot FX transaction is the purchase or sale of one currency for another, with delivery usually two days after the dealing date.
Below you can see a Reuters screen which shows spot rates for various currencies against the USD. The different expressions will be discussed in detail on the next pages.
Big figure
pips
Swift Code
quoting bank
bid rate
offer rate
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1.
Market Conventions
The exchange rate at which the spot transaction is done is called the "spot rate".
Value date of spot transactions The delivery day of a spot transaction is called value date. Business days do not include Saturdays, Sundays or bank holidays in either of the countries of the two currencies involved. If the "normal" value date (two days after the dealing date) falls on a public holiday in one of the centres of the currencies involved, the next working day is taken as the value date for the transaction.
A USD/JPY spot transaction - with dealing date on Wednesday the 4th of January -would normally have value date on Friday, the 6th of January. If however the 6th of January is a public holiday in Japan or in the US, the value date will be deferred to Monday the 9th of January.
USD-CAD-transactions are often dealt on a so-called "funds"-basis. This means that delivery will be done 1 working day after the dealing date.
FX markets in the Middle East are closed on Fridays but open on Saturdays. A USDSAR transaction could therefore have a split settlement date, with the USD delivered on Friday and the SAR delivered on Saturday.
Before implementation of the Euro the value date of cross transactions (FX spot deals not involving the USD) could have been deferred due to US public holidays. Since Euro implementation US public holidays are more and more disregarded in value dates of cross transactions.
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Swift Codes Each currency can be identified by a three-letter code. The first two letters refer to the name of the country. The third letter refers to the name of the currency. These codes are used by the Swift message system and have become international accepted standards. The major currencies and their swift codes are listed in the appendix.
For some currencies nicknames are rather common among dealers. Of course the correct swift code should be used when confirming a trade.
GBP/USD: Cable CHF: SEK: AUD: NZD: Swissi Stocki Aussi, Ozzy Kiwi
Base currency and quote currency Spot rates are quoted as one unit of the base currency (= base currency) against a number of units of the quote currency (also variable currency or counter currency).
When spot rates are quoted, the first currency always represents the base currency (base currency) and the second currency is the quote currency / variable currency.
Base currency
EUR/USD USD/CZK
Euro US-Dollar
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If the spot rate quoted for EUR/USD is 1.0850, this means that one Euro is worth 1.0850 USD.
Bid and offer rates Spot rates are usually quoted in two rates, the bid rate and the offer rate.
The bid rate is the rate at which the bank quoting the price (the market maker) is ready to buy the base currency from the market user (the counterpart asking for a price).
The offer rate is the price at which the market maker will sell the base currency to the market user.
Market Maker Bid Rate: buys base currency sells quote currency Offer rate: sells base currency buys quote currency
Market User Bid rate: sells base currency buys quote currency Offer rate: buys base currency sells quote currency
The market user is the counterpart asking for prices. The market user may be a corporation, an institutional investor, a bank or the central bank.
If a dealer receives a call from another bank, in order to make a quote, he acts as the market maker. If the same dealer is calling another bank in order to ask for prices he acts as the market user. The market maker has the risk of changing rates while quoting, so that afterwards he possibly cannot close his position without loss.
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In order not to be confused by the different dimensions (market maker/market user, bid/offer, base currency/quote currency) we suggest the following procedure:
I.
Adjust the question to be answered for the base currency This means e.g. for a EUR/USD quotation and a question where USD are bought (or sold), the question should be adjusted to EUR to be sold (or bought).
II.
Adjust the question to be answered to market user/market-maker. Market-maker (quoting bank) buys at bid rate and sells at offer rate. Market-user (bank asking for a quote) buys at offer rate and sells at bid rate.
You want to buy USD 10 m against EUR. Four different banks quote you the following prices:
Bank A: 1.0830 - 40 Bank B: 1.0850 - 60 Bank C: 1.0800 - 10 Bank D: 1.0790 - 00 Where do you buy your USD?
I. The base currency is the EUR. You want to buy USD, meaning you sell EUR. II. You ask for the rate. You act as market user and sell EUR at the highest bid rate at 1.0850 to Bank B.
Thus you buy USD 10 m at the rate of 1.0850 and pay EUR 9,216,589.86. (10,000,000/1.0850).
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Reuters Conversation Here you can see a typical Reuters Conversation in the FX Spot Market: #EUR USD 10 12 #URS OK TO CONFIRM I BUY EUR 10 MIO AGAINST USD AT 1.1512 MY EUR DIRECT PLS #TO CONFIRM I SELL EUR 10 MIO AGAINST USD AT 1.1512 #MY USD TO CITI N.Y. PLS #THKS VM AND BIBI #END REMOTE 14
Explanation A hash (#) at the beginning of a line marks your own text.
#EUR USD 10 This bank is asking for a rate for EUR 10 m against USD. Usually you do not tell if you want to buy or sell.
12
14
This bank is quoting the pips of bid and offer rate (market maker).As market participants normally know the big figure, it is left out when quoting so you can save time (FX Spot Market is the fastest market of the world !). In this case we assume that the regular rate is 1.1512 1.1514.
#URS The asking bank deals and sells EUR 10 m at the bid rate (market user). At the same time it buys USD at 1.1512 (i.e. 10,000,000 x 1.1512 = 11,512,000 USD). URS is a common abbreviation for yours which means I sell (opposite mine for I buy).
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OK TO CONFIRM I BUY EUR 10 MIO AGAINST USD AT 1.1512 MY EUR DIRECT PLS The quoting bank confirms the deal and gives payment instructions for the EUR it receives.
#TO CONFIRM I SELL EUR 10 MIO AGAINST USD AT 1.1512 #MY USD TO CITI N.Y. PLS #THKS VM AND BIBI #END REMOTE The asking bank confirms the deal as well and gives payment instructions for the USD it receives. The bank thanks for the deal; the conversation is ended.
Broker Banks can not only trade directly with each other but also via broker. A broker acts as an agent for the two counterparties and receives a brokerage for his service. This brokerage depends on the traded volume, i.e. 10 USD brokerage per traded million EUR would be for 10 m: 10 x 10 = 100 EUR. The brokers advantage is the bigger market depth compared to the one-to-one direct trading in the interbank market as with a broker you have a lot more potential counterparties at the same time. In contrary to his customers the broker never takes trading positions. You can distinguish between voice brokers and electronic brokers resp. broking systems.
A voice broker is a real human being who trades with banks via open telephone line (or Reuters Conversation). He informs his customers about the actual quotes all the time. If a bank trades on a brokers price, a deal is done between this bank and the bank which quoted the price (if they both have enough limit for each other). The broker then confirms the deal with both of them and additionally sends a written confirmation to both counterparts as well.
An electronic broker resp. an electronic broking system works like a voice broker but the quotes and deals are done through a special system. The best known systems are Reuters 3000 and EBS. Also these systems check if both banks have enough limit to deal with each other. The more banks with big limits have been put to the system, the better prices are for the user (bid/offer spread is smaller), the better his liquidity is. All banks log in with so-called Dealing Codes, a code with four letters (e.g. CITL = Citi London). If two counterparts trade in one of these systems you call it matching, i.e. the system checks the quotes of the dealing codes and matches them if it finds identical numbers. Then the system prints a confirmation for both counterparties.
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Spread The spread is the difference between the bid and offer rates.
Currency Pairs Buying Rate (Bid) USD/CHF EUR/USD USD/CZK USD/NOK CHF/JPY USD/JPY USD/SEK GBP/USD GBP/JPY 1,4720 1,0125 30,210 7,4500 86,760 105,80 6,7270 1,5585 195,70 Selling Rate (Offer) 1,4730 1,0130 30,220 7,4800 86,800 105,90 6,7300 1,5595 195,90
The rates shown are examples for the bid and offer rates for interbank spot deals. For customers, spreads are normally a little wider.
If USD/CHF is quoted 1.4720 / 30, the bid rate is the buying price quoted for the USD (or selling price for the CHF). The offer rate is the selling price for the USD (or the buying price for the CHF).
Long-, short-, square-position Banks / dealers of foreign currency, have a long, short or square position in the different currencies.
A long position in a currency means that the dealer has bought more of the currency than he has sold. If this position is taken purposely the dealer expects the currency to rise.