CHAPTER 4

The Foreign Exchange Market: Spot, Forwards and Swaps

The biggest market in the world

Opening question

“Who trades currencies, and how does a forward rate work?”

In this chapter

Why the foreign exchange (FX) market is the largest financial market in the world
Who trades: dealer banks, platforms, central banks, companies, funds and individuals
How to read a spot quote, a pip, a spread and a cross rate
Settlement, settlement risk and how the industry reduced it
How forward rates are set from interest rates, with a worked USD/VND example
FX swaps: the most traded FX instrument and what it is used for
Non-deliverable forwards for currencies that cannot move freely
How the FX market works in Vietnam

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This chapter is in the full book

Chapter 1 is free to read online. The full text of chapter 4 — with its tables, figures, worked examples and practice lab — is available in the complete edition of Forex and Crypto Investing: From Theory to Practice (Volume 3, NXW Investment Library).

Read Chapter 1 free Get the full book — contact@nxw.vn

Sections of this chapter

4.1 The biggest market in the world

4.2 Who trades and how

4.3 Reading a spot quote

4.4 Spreads, liquidity and the cost of trading

4.5 Settlement: two days and two currencies

4.6 Forwards: fixing today a rate for later

4.7 FX swaps: the workhorse of the market

4.8 Non-deliverable forwards

4.9 Choosing among the instruments

4.10 The FX market in Vietnam

← Chapter 3: How Exchange Rates Are Determined Chapter 5: Currency Futures, Options and Volatility →