The Foreign Exchange Process - An Overview

Basic Process

Every foreign exchange transaction involves the buying of one currency and the selling of another. To make the payment to your supplier in Japan, you will need to buy Japanese Yen from Currency Online. Given that this example assumes you are in the United States, you will most likely want to trade United States Dollars (USD) for the Yen. Thus, you will sell United States Dollars to Currency Online. Following payment of your USD, Currency Online then pays your supplier in Japan as per your instructions.

Spot Contracts

The most common type of deliverable FX transaction is a Spot contract. When you need to buy currency immediately, and at the prevailing market rate, you enter a Spot contract with Currency Online. You can also enter a Forward contract, or place an Order to attempt to benefit from favourable market movements. Forward contracts and Orders are discussed in a later section.

Your supplier has invoiced you for ¥250,000. To determine how much this will cost you in United States Dollars, you log in to the Currency Online online trading platform to request a live rate. You specify that you need to buy JPY 250,000 and that you will be selling USD to pay for the Yen.

In this example, the rate offered is 86.10 Yen to each USD, meaning that the ¥250,000 will cost USD$2,903.60. You can sit and watch the offered rate move with the market. The value date for the contract is the date on which the contract will be executed and depends on the means by which you will be paying the sold currency to Currency Online. Typically, the spot date is two trading days in the future.

If you are happy with the rate and decide to proceed, you then enter a spot contract with Currency Online. At this point, you can specify how the purchased currency is to be disbursed. You might choose to hold it in your JPY account with Currency Online, or you might choose to disburse some or all of the funds to a nominated beneficiary you have created earlier (you can also create a new beneficiary at this stage). The beneficiary bank details are specified when you create the beneficiary. Given that you need to pay your supplier in this example, you will either select them from the list of available beneficiaries, or create them as a new beneficiary and specify that they are to receive the entire proceeds of the contract. Your account balances are updated to reflect the current transaction. Your sold currency account (USD) will be debited, and your purchased currency account (JPY) will be credited (if you held the funds on account, they will not be available until the contract is settled).

Settling a Contract

At this point, you need to settle the contract by submitting the amount of the sold currency (USD$2,903.60) to Currency Online as per the specific instructions on the contract. All the details you require, including the bank name, branch, and account number are found in the settlement instructions section of the contract..

Forward Contracts

Forward contracts are similar to spot contracts in that the transaction is executed at the prevailing market rates. The difference is that the value date of the contract might be weeks or months in the future. You specify the forward value date when you request a rate for a forward contract. Forward contracts also typically require that a US Dollar equivalent minimum is met (usually about USD$15,000).

When you enter a forward contract, a percentage (typically 10%) of the value of the contract is to be paid immediately, while the balance is paid one trading day before the value date of the contract. Disbursement of the contract proceeds is the same as with spot contracts.