Understanding Foreign Exchange
A guide to FX rates, spot and forward transactions, and risk.
Last updated: 2026-06-15
A practical overview of foreign exchange (FX) for businesses: how rates are quoted, the difference between spot and forward transactions, and how to manage FX risk.
Spot vs forward transactions
A spot transaction settles an exchange at the current market rate, typically within a couple of business days. A forward contract locks in a rate today for settlement on a future date, which helps businesses budget for a known future payment despite market moves.
Managing FX risk
Currency markets move constantly, and even small rate changes affect margins on cross-border trade. Common risk-management approaches include hedging with forward contracts, aligning receivables and payables in the same currency, and timing conversions strategically rather than reactively.
What moves exchange rates
Rates are driven by interest-rate differentials, inflation, trade balances, geopolitical events, and market sentiment. Because these factors change continuously, the rate quoted for a transaction is confirmed at the moment it is executed.