FX Spot

Also known as: Cash FX, Spot exchange

Exchanging one currency for another, settled in two days — the deepest market humanity has built.

3 min read · 566 words · Updated

1 · SnapshotThe one idea to remember
Key intuition: an exchange rate is the relative price of two economies' money. Every quote is simultaneously a price of one currency and the inverse price of the other — every FX view is a pair of views.
2 · BeginnerWhat is it, really?

An FX spot trade is the simplest deal in finance: swap one currency for another at today's rate, with the money actually moving ("settling") two business days later — the market's ancient convention (one day for USD/CAD).

Rates are quoted as pairs: EUR/USD = 1.10 means one euro buys 1.10 dollars. The first currency (base) is what you're buying or selling; the second (quote) is what you pay with. "Buying EUR/USD" = buying euros, paying dollars.

FX is the largest market on the planet by turnover — running around the clock from Wellington's Monday morning to New York's Friday close. It exists because every cross-border trade, investment, and holiday requires it.

What the quote costs you, and what you actually exchange
Youbuying eurosThe bankquotes both ways1A bid and an offer, in onebreath2The currency you sold3The currency you bought4Not the rate on any screenyou saw

a paymentnot a payment

There is no commission and no exchange fee. The price you are shown already contains what the trade earns the bank.

At the moment of dealing

  1. The bank → You Live for a stated size and for as long as the maker says. The gap between the two is the cost of the trade, and it is the whole cost.

Two business days later

  1. You → The bank Paid in full, at the agreed rate. Nothing was borrowed and nothing is outstanding afterwards.
  2. The bank → You The exchange is complete. Unlike every derivative on this site, there is no obligation left over.

What the rate is not

  1. The bank → You Retail conversions add a margin to the interbank price. The published mid-rate is not a price anybody is obliged to deal at.
Two payments, in two countries, and the plumbing that pairs themafter the trade
YouSettlement systemreleases both legsThe counterparty1Dollars, into one paymentsystem3Both legs releasedtogether2Euros, into another4One payment at a time, and theold risk

a paymentonly if a condition is met

One trade is two payments in two national systems. What makes that safe is a mechanism that releases both legs together or neither.

On settlement day

  1. You → Settlement system Your side, in that currency's own national system.
  2. The counterparty → Settlement system A different country, a different time zone, a different set of banks.
  3. Settlement system → You Payment versus payment: either both settle or neither does, so the hours between never become an exposure.

Outside that system

  1. The counterparty → You A pair or a counterparty not covered settles gross: you pay out and hope. This is why an operations team cares which currencies a desk has started trading.
Asset class
Foreign exchange
Instrument type
Spot transaction
Traded
OTC, 24/5, the largest turnover of any market
Typical users
Everyone from tourists to central banks

Which risks decide the outcome

Not how risky this is, and not a rating — there is deliberately no total. It says which of five failure modes drives what happens here, in the same order on all 129 products so they can be compared. This publication's own reading; see the notice below.

  • Marketdecides it
  • Creditbarely applies
  • Liquiditybarely applies
  • Fundingbarely applies
  • Operationaldecides it

What decides it here. One exchange, two payments, two national systems. What can go wrong is a payment sent to the wrong place or arriving after a cut-off, not a price.

What the five mean, and which one decides where →

3 · IntermediateHow it works in practice

Market structure

  • No exchange: FX is a decentralised dealer network — banks, ECNs (EBS, LSEG Matching), and single-dealer platforms, stitched together by arbitrage.
  • The spread: EUR/USD trades ~0.1–0.5 pips wide for institutions (a pip = 0.0001); retail and exotic pairs pay far more.
  • Settlement risk: paying yen before receiving dollars killed Bankhaus Herstatt in 1974; today CLS settles most major-pair volume payment-versus-payment.

What moves currencies

  • Interest-rate differentials — capital chases yield; central-bank surprises are FX's biggest single-day movers.
  • Trade and capital flows, terms of trade (commodity currencies like AUD track commodity prices).
  • Risk sentiment: funding currencies (JPY, CHF) strengthen in panics as carry trades unwind; the dollar rallies in global stress (the "dollar smile").

Conventions worth knowing

Quote order follows market hierarchy (EUR before USD before JPY...); "cable" = GBP/USD, "the fix" = the 4pm London WM/R benchmark around which massive index-related flow concentrates (and around which several manipulation scandals happened).

Worked example: you sell €10M at 1.1000 → receive $11.0M in two days. The rate ticks to 1.0990 a minute later: your timing earned $10,000 versus waiting — FX P&L in its purest form.
4 · AdvancedPricing & valuation

Is spot "priceable"?

Spot has no cash-flow formula — it's the numéraire ratio itself. Structure comes from parity conditions linking it to rates and expectations:

$$ \text{CIP: } F = S\,\frac{1+r_{quote}\tau}{1+r_{base}\tau} \qquad \text{UIP: } \mathbb{E}[\Delta S] \approx r_{quote} - r_{base} $$
What the symbols mean
  • Fthe forward or futures price
  • Sthe price of the underlying today
  • rthe interest rate, per year
  • qthe dividend yield, per year
  • ta point in time
  • tautime remaining, in years

Covered interest parity (CIP) is enforced by arbitrage (though a persistent post-2008 cross-currency basis shows balance-sheet limits to it). Uncovered parity (UIP) fails empirically at short horizons — high-yield currencies do not depreciate as predicted — which is precisely the carry trade's existence theorem, compensated by crash risk.

Microstructure

Price discovery concentrates in order flow: signed flow explains a large share of daily returns (Evans–Lyons). Dealers manage inventory via internalisation (netting client flow) with only residuals hitting ECNs — which is why measured "volume" understates true risk transfer, and why last-look controversies exist in electronic FX.

Equilibrium anchors

Long-run: PPP (price-level convergence) works at decade horizons; BEER/FEER models add productivity (Balassa–Samuelson) and external balances. Practitioners treat these as slow-moving anchors around which flow and rate differentials set the path.

Volatility surface preview

Spot's risk-neutral distribution is read from the FX options market via risk reversals and butterflies — the sharpest live gauge of crash-direction expectations for any currency pair.

The formulas above are standard textbook formulations, simplified for teaching. They explain the mechanism — they are not a valuation tool, and they will not reproduce a dealer’s price.

5 · Desk notesHow practitioners think about it
Practitioner note: in FX, your "position" is always a spread between two money-market accounts. Forget that, and swap points and roll costs will remind you monthly.

Now say it back

Close the page and give FX Spot in four sentences. It takes a minute and it is the only way to find out whether reading it was enough.

  1. Who wants what — two parties wanted opposite things badly enough to write it down.
  2. What the contract obliges, and when — not the payoff; the obligation.
  3. Where the money comes from — name the source, or you have described a hope.
  4. What makes it lose — the ordinary way, not the dramatic one.

Do it with a clock → · why these four

Put FX Spot beside any other instrument →

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