Spot foreign exchange

Spot foreign exchange

Spot Exchange Transactions: also known as spot trading or spot trading, refers to a trading behavior in which both parties complete the delivery procedures on the same day or within two trading days after the foreign exchange buying and selling is completed. Spot foreign exchange trading isforeign exchange marketThe most commonly used trading method is spot forex trading, which accounts for the majority of the total forex trading volume. Mainly because spot foreign exchange trading can not only meet the temporary payment needs of buyers, but also help both buyers and sellers adjust the currency ratio of their foreign exchange positions to avoid foreign exchange rate risks.

Spot foreign exchange market transactions are usually delivered on the same day or within two business days, usually within the second business day after the transaction, such as in markets like London, New York, Paris, etc. In the Hong Kong market, the spot exchange rate of the Hong Kong dollar against the US dollar is cut on the same day, while the exchange rate of the Hong Kong dollar against the Japanese yen, Singapore dollar, Australian dollar, etc. is cut on the next day. Other currencies are cut on the third day, which is the second business day after writing.

participant

The spot foreign exchange market at the Bank of China headquarters building is a highly specialized market composed of banks and foreign exchange brokers. Companies and individuals can only act as customers of the bank and engage in spot foreign exchange trading through the bank. They cannot become direct members of the market. At present,Shield BoThe spot foreign exchange market has far more trading methods than other foreign exchange markets, both in terms of total trading volume and average trading volume per transaction. Such as futures, forwards, and options.

In China, personal foreign exchange trading mainly occurs in the spot foreign exchange market. Individuals cannot directly engage in foreign exchange transactions and must go through banks. Individuals who want to engage in this business can open accounts at banks that have already conducted foreign exchange transactions.

Buying and selling methods

1. Foreign exchange buying and selling through remittance method

Favourable exchange is a payment method in which the remitter entrusts a bank to use a certain credit instrument (such as a bill of exchange) to pay the funds to the payee through its foreign branch or agent bank.

The process involves banks receiving local currency domestically and paying foreign exchange abroad. Because its exchange direction is consistent with the flow of funds, it is called forward exchange. In the forward remittance method, customers purchase bills of exchange from foreign exchange banks in their domestic currency, which is equivalent to the bank selling foreign exchange.

The parties involved in Shunhui:

(1) Remitter, usually the debtor or payer;

(2) Payee refers to the creditor or beneficiary,

(3) Remitting bank is a bank entrusted by the remitter to remit money to the payee;

(4) A paying bank is a bank entrusted by the remitting bank to receive remittances from the remitting bank and remit the funds to the payee, also known as the receiving bank.

The relationship between remittance and payment banks is a principal-agent relationship. After receiving the local currency and selling the foreign exchange, the bank shall notify the creditor or the branch or agent bank of the recipient's country through wire transfer, letter transfer, and bill transfer according to the customer's requirements, and pay a certain amount of foreign exchange in their foreign currency deposit account to the recipient at the exchange rate of the day. In this way, the foreign exchange bank increased the amount of domestic currency paid by customers in its own account, while the corresponding amount of foreign currency deposits in foreign currency accounts decreased.

The three specific forms of Shunhui:

According to different delivery methods, spot foreign exchange transactions can be divided into three types.

Telegraphic Transfer (T/T) is the method of delivery by wire transfer. Bank selling wire transfer is a remittance method in which the remitter directly notifies the receiving bank abroad by telegram or telex, and entrusts them to pay a certain amount to the payee. The wire transfer delivery method is to notify the opening bank (or entrusted bank) of both foreign exchange buyers and sellers by telegram or telex to record the receipt and payment of the transaction amount. The voucher for wire transfer is the telegraphic or telegraphic remittance authorization letter from the remitting bank or trading center.

Bill of exchange delivery method, abbreviated as demand draft (D/D). Selling foreign exchange marks by banks refers to a remittance method in which the remitting bank, upon the request of the remitter, issues a bill of exchange with the foreign remitting bank as the payer, and the remitter sends it to the payee or personally carries it to the remitting bank for withdrawal. Bill of exchange delivery refers to the payment and collection of accounts through the issuance of bills of exchange, promissory notes, and checks. These bills are the vouchers for the bills of exchange.

The delivery method of mail transfer, abbreviated as Mail Transfer. Bank selling remittance is a remittance method in which the remitting bank, upon the request of the remitter, directly notifies the foreign remitting bank by letter to entrust it to pay a certain amount to the payee. The method of foreign exchange delivery refers to notifying the account opening bank or entrusted bank of both foreign exchange buyers and sellers by letter to record the receipt and payment of transaction amounts. The voucher of Xinhui is the Xinhui payment authorization letter issued by Jiangqian Bank or the trading center.

The costs and benefits of the three remittance methods mentioned above are different. In the process of remittance receipt and payment, there is a time difference between the local currency of income and the foreign currency of payment due to different remittance methods, which determines the different exchange rates for different remittance methods, and the exchange rate depends on the length of the time difference. If the remittance is in transit for a long time, the bank can use the funds for a longer period of time, resulting in higher returns but lower fees. Therefore, the bank's quotation is also lower. Conversely, if the time is short, the bank can use the funds for a shorter period of time, resulting in lower returns but higher fees. This is why the bank's quotation is higher. Generally speaking, wire transfers have the shortest transit time (1-2 days) and banks are unable to utilize the funds, resulting in a higher wire transfer exchange rate. Letter and bill remittances are mainly sent by mail, with longer transmission times. Banks have the opportunity to make profits from these remittances, and their exchange rates are lower than those of wire transfers. In fact, the difference between these is equivalent to the interest income during the mailing period. At present, exchange rates are generally calculated based on the wire transfer exchange rate, which has become the basic exchange rate for spot transactions. With the widespread application of electronic computers and the increasing computerization of international communication, the delivery time has been greatly shortened, so the differences between several forms of remittance are gradually narrowing.

2. Foreign exchange buying and selling through reverse exchange method

Adverse exchange, also known as collection method, refers to a payment method in which the payee (creditor) issues a bill and entrusts its foreign branch or agent bank to collect the amount listed on the bill from the payer. Due to the fact that the flow of funds in this way is opposite to the transmission direction of credit instruments, it is called "reverse exchange".

For foreign exchange banks, in the reverse exchange method, customers selling bills of exchange to the bank are equivalent to the bank paying the local currency and buying foreign exchange. After accepting the collection commission from the payee, the foreign exchange bank should notify its foreign branch or agent bank to collect a certain amount of foreign currency from the payer at the exchange rate of the day and include it in its foreign exchange account held at the foreign bank. As a result, the balance of the bank's domestic currency deposit account decreased, while the corresponding foreign currency amount increased in its foreign currency deposit account.

Related terms

1. Delivery

The act of "clearing money and goods" after a transaction is completed, with the delivery date being the day of the transaction, known as value today; The delivery date is the first business day after the transaction, known as the next day or value tomorrow delivery. The delivery date is the second business day after the transaction, known as spot delivery or value spot delivery.

2. Business Day

Refers to the date when banks in two clearing countries are open for business. If a country experiences a holiday, the delivery date will be postponed according to the number of holidays.

3. Trader

A US trader refers to a trader in the foreign exchange market. Its responsibility is to collect daily orders from enterprises, companies, or private clients to buy and sell foreign exchange, register these orders sent to banks in writing or by phone according to various foreign exchange, and then decide to buy or sell based on positions and prices, so that banks can quickly find targets and complete transactions. Foreign exchange traders often use mysterious technical language (jargon) and need to make quick decisions within seconds, with strong trading skills. For example, when a customer inquires about a price from a bank, the bank trader must consider the other party's creditworthiness, the currency and quantity bought or sold, the bank's own foreign exchange position, and market exchange rate trends to immediately decide on a quote.

4. Quotation

The exchange rate quoted by foreign exchange banks for buying or selling foreign exchange during transactions. Generally, the "dual level" quotation method is adopted, which means that foreign exchange banks quote both the bid rate and offer rate during the transaction.

If US $1=HK $7.7516~7.7526, the former is the buying price and the latter is the selling price. The spread between the buying and selling prices of banks refers to the income earned by foreign exchange banks from buying and selling foreign exchange, usually ranging from 1 ‰ to 5 ‰. In practical operation, foreign exchange traders do not declare the full price, only the last two decimal places of the exchange rate. As in the previous example, if the exchange rate at that time was US $1=HK $7.7516~77526, the Hong Kong bank would only report: 16~26 or 16/26 when asked. This is because the fluctuation of foreign exchange rates generally does not exceed the last two digits within a day, so there is no need to quote the full price, which is also the habit of banks to quote. If the exchange rate fluctuates sharply within a day, breaking convention, it's another matter.

Transaction Examples

Example: On September 10, 1998, Citibank in New York and Bank of Tokyo in Japan reached a foreign exchange trading agreement over the phone. Citibank was willing to sell 1 million US dollars and buy 136.85 million Japanese yen at an exchange rate of 1 US dollar to 136.85 Japanese yen; Tokyo Bank is also willing to sell 136.85 million yen and buy 1 million US dollars at the same exchange rate. On September 11th, the two banks respectively transferred the sold currency to the designated account of the other party as requested, thus completing the transaction.