What is a Foreign Exchange Transaction?

An FX transaction may be useful in managing the currency risk associated with importing or exporting goods and services denominated in foreign currency, investing or borrowing overseas, repatriating profits, converting foreign currency denominated dividends, or settling other foreign currency contractual arrangements.

How does an FX transaction work?

Foreign Exchan

When you enter into an FX transaction, you nominate the amount (the contract amount) and the two currencies to be exchanged. These currencies are known as the currency pair and must be acceptable to your foreign exchange provider.

What is a Foreign Exchange Transaction?

You also nominate the maturity date on which you want the exchange of currencies to take place. Your FX provider will then determine the exchange rate, known as the contract rate, based on the date and currencies nominated by you. The contract rate is the rate at which the currencies will be exchanged.

On the contract date the contract amount must be exchanged with your FX provider at the contract rate, irrespective of where the foreign exchange rate is at the time.

How does your FX provider determine your contract rate?

It is the agreed exchange rate at which the currency pair will be exchanged on the date of maturity. Your currency provider determines the contract rate, taking several factors into account including:
the currency pair and the time zone you choose to trade in the maturity date set by you inter-bank spot foreign exchange rates the contract amount, and your currency providers ability to trade small amounts on the inter-bank market market volatility inter-bank interest rates of the countries of the currency pair.

Contract rates are quoted as spot exchange rates, value today exchange rates, value tomorrow exchange rates, or forward exchange rates, depending on the maturity date nominated by you.

What is a Foreign Exchange Transaction?

John Zilic has over 20 years working in Financial Markets. For over fifteen of those years he has worked within the Foreign Exchange Payments division of a leading Australian Bank. This article is for general educational purposes only. It does not constitute, and may not be used for the purposes of, an offer, invitation, solicitation or recommendation to enter into an FX transaction.

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