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When it comes to trading currencies, a company, individual or financial institution needs to access the foreign exchange or forex market where they will usually exchange or trade the currency they have, for the currency they want. They will generally do so at an exchange rate that reflects the current level of supply and demand that prevails in the forex market for the currency pair involved in the transaction.
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Traditional Forex Quotations
In general, when trading currencies, each currency in the currency pair involved has a traditional dominance in the quotation that forex traders make. Most of the currencies of smaller or developing countries traditionally take on a secondary role to the U.S. Dollar, which becomes the primary currency in the forex quotation. These include the Japanese Yen, the Swiss Franc, the Canadian Dollar, the Scandinavian currencies and most other relatively minor currencies.
A quotation in such so-called counter-currencies where the Dollar is dominant, the Japanese Yen for example, would be written as follows:
On the other hand, certain well-developed countries or trading blocs are usually quoted as the primary currency relative to the U.S. Dollar when trading currencies of this type. These dominant currencies include the U.K.’s Pound Sterling, the European Union or Eurozone’s Euro, the Australian Dollar and the New Zealand Dollar or Kiwi. A quotation in such currencies, Sterling for example, would be written as follows:
Executing Forex Transactions
Those who wish to get involved in trading currencies will need to know how to ask for an exchange rate quotation. Dealing electronically has become relatively easy, since most forex dealing systems will patiently walk account holders through a transaction.
Nevertheless, if a trader will be trading currencies over the phone with a dealing desk, and they need to buy British Pound Sterling and sell the U.S. Dollar in the amount of 1 million Pounds, they would need to ask the dealer for a price in 1 million pounds and then be prepared to buy at or “take” the higher price quoted.
Since a typical quote might be 1.6000/05, for example, the trader might say some variation of “at 05, I buy 1 million Pounds.” Since most forex prices are only good “as long as the breath is warm,” as the market saying goes, the trader will need to decide quickly whether to trade or politely ask for a refreshed price.
Delivery Dates When Trading Currencies
Unless trading currencies using futures or forward contracts, the date that most foreign exchange contracts require the amounts of the respective currencies involved to be exchanged or “delivered” is two business days from the date that the transaction originally dealt.
With respect to terminology, the market typically refers to this as “value spot” or just “spot.” The main exception to this rule is the Canadian Dollar which generally delivers one business day from the date of execution against the U.S. Dollar.
Many personal forex traders avoid going through delivery when trading currencies, since they tend to trade on margin. Accordingly, they often close their positions out quickly after execution. For those who wish to hold longer-term positions, they will commonly roll their foreign exchange positions forward to a more distant date to avoid having to go through delivery.