Buying/Selling

In the forex market currencies are always priced in pairs; therefore all trades result in the simultaneous buying of one currency and the selling of another. The objective of currency trading is to exchange one currency for another in the expectation that the market rate or price will change so that the currency you bought has increased its value relative to the one you sold. If you have bought a currency and the price appreciates in value, the trader must sell the currency back in order to lock in the profit. An open trade or position is one in which a trader has either bought/sold one currency pair and has not sold/bought back the equivalent amount to effectively close the position. {TOP}

Quoting Conventions

The first currency in the pair is referred to as the base currency, and the second currency is the counter or quote currency. The U.S Dollar, as the world's dominant currency, is usually considered the base currency for quotes, and includes USD/JPY, USD/CHF, and USD/CAD. This means that quotes are expressed as a unit of $1 USD per the other currency quoted in the pair. The exceptions are the Euro, Great Britain pound, and Australian dollar. These currencies are quoted as dollars per foreign currency. As with all financial products, FX quotes include a "bid" and "ask". The bid is the price at which a market maker (FX Merchant) is willing to buy (and clients can sell) the base currency in exchange for the counter currency. The ask is the price at which a market maker (FX Merchant) will sell (and clients can buy) the base currency in exchange for the counter currency. The difference between the bid and the ask price is referred to as the spread. In the wholesale market, currencies are quoted using five significant numbers, with the last placeholder called a point or a pip. In forex, like any traded instrument, there is an immediate cost in establishing a position. For example, USD/JPY may bid at 131.40 and ask at 131.45, this five-pip spread defines the trader's cost, which can be recovered with a favorable currency move in the market. By quoting both the bid and ask in real time, FX Merchant ensures that traders always receive a fair price on all transactions. For other commodities where traders must request a price before dealing, brokers have the opportunity to check a trader's existing position and 'shade' the price (in their favor) a few pips depending on the trader's position.
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What Every Currency Trader Must Know

The forex market is one of the most popular markets for speculation due to its enormous size, liquidity, and tendency for currencies to move in strong trends. An enticing aspect of trading currencies is the high degree of leverage available. Knowing that even seasoned traders suffer losses, speculation in the forex market should only be conducted with risk capital funds that if lost will not significantly affect one's personal financial well being. {TOP}

1. Spot and Forward Rates: Value Dates
Every forex transaction involves exchange of two currencies by the counterparties to the transaction. One party, for example, receives dollars in New York and pays out rupees in Mumbai. The counterparty pays out dollars and receives rupees in the respective centres. The date on which the exchange of currencies is to take place is the "value date" of the transaction. In theory, the essential principle of valuer compensee (compensated value) requires the currencies to change hands at the same point of time. In practice, this is not possible because of time differences in the two centres. Hence, the use of value dates, i.e. currencies must be paid and received on the same day. Worldwide, standard nomenclatures and practices are prevalent to determine the value date of exchange contracts, namely the date on which the two currencies involved in an exchange transaction change hands. Since money in any currency has a time value, namely interest, the value date of a foreign exchange transaction will have to be a working day in both the centres where the money transfers are to take place, e.g. rupees being paid in Bombay, and the dollars being received in New York. If either of the two centres has a holiday on a particular day, its date cannot be a proper value date for a dollar: rupee transaction. {TOP}

The standard nomenclatures for value dates are -
a. ready or cash - value today
b. tomorrow ("tom") - value tomorrow, or next working day
c. spot - value two business days after the trading date (one business day for Can $: US $ transactions and $: Yen contracts in the east). Thus, for a spot transaction done Monday, currencies will change hands the following Wednesday assuming this is a working day in both the centres. Similarly, for a spot transaction done Thursday, currencies will change hands the following Monday, there being no forex transactions on Saturdays and Sundays. While the definition of "spot" maturity seems straightforward, in practice some difficulties crop up because of different holidays at different centres, particularly in case of crosscurrency (i.e. neither currency is home currency of the centre) trades. Consider a dollar: euro trade in London on a Friday. In the normal course settlement will be on the following Tuesday if this is a business day in London, New York and Frankfurt (remember, the euros will change hands in Frankfurt and the dollars in New York). If Tuesday happens to be a holiday in any of the three centres, then settlement will be postponed to Wednesday. But what if Monday, not Tuesday, is a holiday, say in London? In that case, a specific settlement date is agreed to by the counterparties, generally the "spot" day for the bank initiating the trade. {TOP}

d. Forwards - any value date beyond spot. The rules for determining value dates of standard maturities of forward transactions are as follows -
(i) In general, the value date of a one month forward contract will be the date in the next month corresponding to the "spot" value date. Let us consider a transaction done on Monday, the 18th January 1999. The value date for a spot transaction will be Wednesday, the 20th January and the value date of a one month forward transaction undertaken on 18th January will be 20th February.
(ii) If the value date so calculated happens to be a holiday in either centre (as it is in the above case, 20th February 1999 being a Saturday), the subsequent working day. In this case, 22nd February 1999 will be the value date for a one month forward transaction. However, if this means a change of moth, the preceding working day would become the value date. Fore example, for a transaction involving rupees done Monday, 25th January 1999, spot date is 28th January, 26th January being a holiday in India. The one month forward transaction will therefore have, by rule (i), 28th February as the value date. But this happens to be a Sunday. The subsequent working day, namely 26th February, would become the value date for the one month forward contract.{TOP}

(iii) The rule of "no change in the month" also applies in cases where the month in question does not have a date corresponding to the spot date. For instance, the spot date for a transaction done Wednesday 27th January 1999 will be 29th January. Since there is no such date as 29th February 1999, the one month forward contract will mature on 28th February. But this happens to be a Sunday. So the value date for a one month forward contract done on 27th January 1993 will be 26th February. In fact for one month forward transactions done against the rupee on any day between 22nd January to 27th January 1999, the value date is 26th February, through a combination of rules (ii) and (iii).

(iv) There is another exception in cases where the spot date is the last date of the month. In that case, the value date for a one month forward contract is the last working day of the subsequent month. (If spot is 28th February, one month forward will be 31st - and not 28th - March){TOP}

(In the above examples, holidays other than 26th January, Saturdays and Sundays have been ignored. Also, the same rules apply to two, three, four months' forwards).

While the rules appear somewhat complicated, it is essential to understand them thoroughly. They govern not only the value dates of standard maturity of forward exchange contracts, but also the maturities of one month/two months, etc., deposits in the offshore market.

Forward transaction can also be structured to give one of the parties to the transaction an option to determine any value date within a prescribed period. Such options are required because the party may not know in advance the precise date on which he would be able to deliver the currency.
One example of this would be an exporter desiring to sell forward foreign currency to his bank, but not knowing in advance the precise date of shipment, after which he has a foreign currency claim on his buyer. In India, the option period is limited to a month.

For additional information, the following internet sites are useful:
BIS - www.bis.org | RBI - www.rbi.org.in