Foreign Exchange

Meaning of Foreign Exchange

Foreign exchange, also termed as Forex refers to the conversion of one country’s currency into another country’s currency. A single country’s currency is valued against another’s currency or against a basket of currencies.

The global foreign exchange market involves daily volumes ranging in trillions of dollars thereby making it the largest financial market in the world. Foreign exchange transactions are executed over the counter and there is no specific centralised market for the same.

On knowing the meaning of foreign exchange, let us now know about the foreign exchange market.

Meaning of Foreign Exchange Market

The foreign exchange market is a floor provided for buying, selling, exchanging and speculation of currencies. Foreign exchange market also undertakes currency conversion for investments and international trade. The Foreign exchange markets also termed as, Forex markets, consists of investment management firms, central banks, commercial companies, retail forex brokers, and investors.

On understanding about the foreign exchange market, we will gain an insight on the foreign exchange transactions that take place in these markets.Foreign Exchange

Meaning of Foreign Exchange Transactions

Foreign exchange transaction refers to purchase and sale of foreign currencies. The transactions are done with an exchange of a specific country’s currency for another at an agreed exchange rate on a specific date.

Let us move on and know about the types of foreign exchange transactions.

Types of Foreign Exchange Transactions

Foreign exchange transactions include all conversions of currencies which may be done by a traveler on an airport kiosk or billion-dollar payments made by financial institutions and governments. The growth in globalisation has led to a massive increase in a number of foreign exchange transactions in the recent years.

The following are the types of foreign exchange transactions:

Spot Transactions

This method of transaction is the fastest way to exchange currencies. Spot transaction refers to the exchange or settlement of the currencies by the buyer and seller within two days of the deal without a signed contract. The Spot Exchange Rate is the prevailing exchange rate in the market.

Forward Transactions

Forward transactions are future transactions when the buyer and seller enter into an agreement of purchase and sale of currency after 90 days. The agreement is framed on the basis of a fixed exchange rate for a definite date in the future. The rate at which the deal is fixed is termed as Forward Exchange Rate.

Future Transaction

Future transactions also deals with contracts in the same manner as forward transactions. However, in case of future transactions, standardized contracts in terms of features, date, and size should be followed. Whereas, regular forward transactions have flexibility and can be customised. In future transactions, an initial margin is fixed and kept as collateral in order to establish a future position.

Swap Transactions

A simultaneous lending and borrowing of two different currencies between two investors are referred to as swap transaction. One investor borrows a currency and repays in the form of a second currency to the second investor. Swap transactions are done to pay off obligations without suffering a foreign exchange risk.

Option Transactions

The exchange of currency from one denomination to another at an agreed rate on a specific date is an option for an investor. Every investor owns the right to convert the currency but is not obligated to do so.


In a nutshell, foreign exchange is the conversion of one currency of a country into the currency of another country in order to settle payments.


Last updated on : November 17th, 2017
What’s your view on this? Share it in comments below.

Leave a Reply

International vs. Domestic Finance
  • International Financial Markets
    International Financial Markets
  • International Banking
    International Banking
  • Straight Bill of Lading
    Straight Bill of Lading
  • Purchasing Power Parity
    Purchasing Power Parity
  • Subscribe to Blog via Email

    Enter your email address to subscribe to this blog and receive notifications of new posts by email.

    Join 122 other subscribers

    Recent Posts

    Find us on Facebook

    Related pages

    what is pbt in financethe asset turnover ratio is computed by dividingwhat does payback period meanhow to calculate shareholder equityhow to calculate dcrformula of payback periodhow to calculate eps growth ratecalculating net income formulaequipment leasing leadswhich capital budgeting technique is bestreceivables turnover calculationdefinition of zero budgetingdirect & indirect expensesicr formulaformula of shareholders equitydebtors collection period examplebonds callableunproductive assetshow to calculate selling and administrative expensesbank overdraft limitaccounts receivable turnover in daysfactoring source of financetypes of estimates pptmeaning of surplus in hindisinking fund debenturesadvantages of conglomerateslimitations of traditional costing systemwhat is the difference between current assets and noncurrent assetsdupont system analysisthree stage dividend discount modelinternally generated fundsliquidation value methodretained earnings calculatorwhy is the capital expenditure budgeting process importantdifference between stockholder and stakeholderadvantages and disadvantages of underwritingcalculating dividends per sharewac weighted average costtrade creditors accounts payableinterpreting debt to equity ratiozero coupon bonds definitiondebit meaning in hindiadvantages and disadvantages of profit maximisationhow to calculate internal rate of returnconstant dividend growth formulaar turnover ratio formulabill discounting wikipediafccb guidelinesratio analysis of financial statementscreditors collection periodtrade credit advantages and disadvantagescash accounting versus accrual accountingliquidation value meaningdepreciation in cost of goods soldecb for working capitalpost finance efinancewhat is meant by waccadvantages of arraverage rate of return method of capital budgetingdirect and indirect expensewhat is the difference between multinational and international companiestheories of dividend decisionadvantages and disadvantages of cost volume profit analysismaturity factoringdebit formulawhat is pledge and hypothecationdefine mirrhindi meaning of expenditurethe basic accounting equation isaccounts receivable turnover ratioweighted average cost calculatorprofit maximisation tutor2uadvantages and disadvantages of working capitaldefinition of hedging in financerevaluation ifrsdebit credit meaning accountingsolving for yield to maturitylc advising processhindi meaning of incurredprepaid expenses classified as current assets representsundries accounting definition