Foreign exchange is the buying of one currency and selling it against another. For example if you have sold and overseas property and wish to take advantage of, for example, the strength of the euro against pounds sterling.
Buying currency implies buying the first currency and selling an equivalent amount of the second currency to cover the costs of the first; for example buying euros using US dollars. A currency pair would be bought if the investor believes the exchange rate for the original currency will go up relative to that of the currency being purchased.
Selling the currency implies selling the first currency and buying an equal amount of the second currency in order the buy the first; for example buying US dollars using euros. An investor would sell a currency pair if he/she thought that the exchange rate will go down for the original currency relative to the second currency or vice versa.
As well as trying to make a profit out of buying and selling currency, investing in foregin exchange may also be useful if you are considering retiring, moving or investing abroad, or planning to purchase a holiday home.
When buying and selling currency there are various options avaliable for currency exchange. An immediate or “spot” tracnsaction would be most suitale should you require the sale or a purchase of currency for immediate delivery. Forward contract agreements gaurantee a pre arranged exchange rate and would be used for more long term investments in order to avoid short term fluctuations in the currency market. These can be provided in two bascis forms:
Fixed forward contract: This allows you to agree on a fixed rate for delivery on a specified date. This type of contract would most commonly be used to protect investors from fluctuating currency movements and additionally lock onto the most appropriate exhange rate.
Time flexible forward: Fundamentaly the same as a fixed forward contract, the only defference being a specified date for delivery is not required. This type of contract gives you the flexibility to cop with any uncertainty with possible payment arrangements. It must be noted that this type on contract is only avaliable in the major currencies.