FX Spot
Also known as: Cash FX, Spot exchange
Exchanging one currency for another, settled in two days — the deepest market humanity has built.
- Asset class
- Foreign exchange
- Instrument type
- Spot transaction
- Traded
- OTC, 24/5, ~$7.5tn daily (all FX)
- Typical users
- Everyone from tourists to central banks
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 — roughly $7.5 trillion a day across all instruments — 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.
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).
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:
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.