FOREX: Spot transactions
This type of transaction accounts for almost a third of all FX market transactions. Two parties agree on an exchange rate and trade currencies at that rate.
* A trader calls another trader and asks for a price of a currency, say British pounds.
This expresses only a potential interest in a deal, without the caller saying whether he wants to buy or sell.
* The second trader provides the first trader with prices for both buying and selling (two-way price).
* When the traders agree to do business, one will send pounds and the other will send dollars.
By convention the payment is actually made two days later, but next day settlements are used as well.
Although spot transactions are popular, they leave the currency buyer exposed to some potentially dangerous financial risks. Exchange rate fluctuations can effectively raise or lower prices and can be a financial planning ordeal for companies and individuals.
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