What is Forex? Currency markets, exchange rates and CFDs

Forex is the market for exchanging and pricing currencies, including contracts linked to their exchange rates. Follow a shop in Poland that needs to pay an invoice in euros: learn how to read a quote, compare the total cost and establish whether an agreement will provide currency for the payment.

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Why different euro rates exist

A “euro rate” may be a reference, the midpoint of two prices or a client's offer. These numbers have different meanings. An informational rate does not promise a transaction at that price.

• Reference rate: for example, the average rate in Table A from Narodowy Bank Polski (NBP), Poland's central bank, or the European Central Bank (ECB) reference rate. It follows a specified methodology. The ECB expressly states that its publication is informational and discourages using it for transactions. [8] [9]
• Mid-price: the arithmetic average of bid and ask in a given source at a given time. It may help comparisons, but need not be a price at which anyone will execute an exchange. It is not automatically NBP's average rate. CME [15] uses this bid/ask midpoint definition.
• Bank or currency exchange provider rate: a price for a particular direction, amount and service. A provider's “euro buying rate” usually means it buys euros from the client. A client buying euros needs its selling rate.
• Execution price: the rate actually applied to the transaction. A price previously visible on a chart may use a different source or market side, or may be informational.
• CFD quotation: the price of a contract referring to a currency pair. It is not an offer to sell euros the client can withdraw.

The midpoint and the cost of an actual exchange

The earlier offer comparison shows which side of the quote to use. Here, let's calculate the midpoint of bid and ask. In a separate hypothetical quote, the provider buys euros at 4.36 and sells them at 4.40. The midpoint is (4.36 + 4.40) ÷ 2 = PLN 4.38 per euro. It is not a separate offer to exchange at 4.38. A client buying EUR 1,000 pays PLN 4,400; a client selling that amount receives PLN 4,360.

If the client bought and immediately resold the same EUR 1,000 at unchanged prices, the difference would be PLN 40: 4,400 − 4,360. This comes from crossing from the provider's selling price to its buying price, before any additional fees. The rate does not move over time in this model, so the result is not a loss caused by a market move.

Four different euro rates available on the same day

The following four values were available on 1 October 2026. All express PLN per EUR 1 but come from different publications. These are actual historical reference data, rather than a comparison of offers to buy currency.

The date a rate is available is not its observation time. Table C was announced on the preceding day, while NBP and the ECB publish references at different times. These differences do not establish that either central bank offered a client cheaper euros.

What a client compares in an actual exchange

The figures below are educational assumptions, rather than quotes from those institutions or offers from 1 October. Suppose that, at the same moment, a bank sells euros at PLN 4.40 and a currency exchange provider at PLN 4.38. Buying EUR 1,000 would cost PLN 4,400 and PLN 4,380 respectively—a PLN 20 difference before additional fees. A meaningful comparison requires both rates to concern sales of euros to the client, the same amount and the same form of exchange.

If a broker simultaneously displays hypothetical EUR/PLN CFD quotes of 4.3790 and 4.3810, the midpoint is 4.3800. A similar number does not mean the client can buy EUR 1,000 there for a trip. The price concerns a contract, rather than a euro balance. The lesson on spreads, commissions and swaps discusses exchange and contract costs.

Paying by card abroad and converting into zlotys

A card payment's conversion rate depends on the account and transaction currencies and the card issuer's and payment network's rules. A terminal may offer dynamic currency conversion (DCC): the merchant or ATM operator converts the amount into the card's currency, such as PLN in this Polish example. You compare that offer with conversion under the card's rules. Neither option should be assumed always cheaper. Visa stresses disclosure of the rate and markup and preserving the customer's choice. [12]

Suppose a purchase costs EUR 100. The terminal proposes DCC at PLN 450. In our assumed outcome, the alternative—paying EUR 100 and conversion under the card's rules—costs PLN 438 including fees. The difference is PLN 12. If the final card conversion instead cost PLN 456, the comparison would reverse. These hypothetical amounts compare two conversion routes. Before payment, you may not know the final amount under the second route, so a lower rate number on one screen is insufficient: the conversion method and fees matter. Visa [12] explains DCC presentation rules.

A transfer illustrates the same basic distinction: sending euros already held does not require buying them again, whereas funding a EUR transfer from PLN may involve exchange. Establish who performs it and which rate applies.

Exchange, hedging and speculation have different purposes

Someone buying euros for a trip needs currency to spend. An importer wants to pay a foreign invoice. A fund may exchange currencies before purchasing assets abroad. In these cases, exchange serves payment or investment rather than a pure bet on the rate.

Hedging addresses risk arising from an existing or anticipated payment or position. The shop in the opening example can agree the terms of its future euro purchase in advance. This reduces uncertainty about the invoice cost without requiring a correct prediction of the market's direction.

In the same model, the importer can agree a deliverable forward at 4.35, making EUR 10,000 cost PLN 43,500. If the rate is 4.40 on the payment date, it avoids a rise to PLN 44,000. If the rate falls to 4.20, it still performs the forward for PLN 43,500, even though a new exchange at 4.20 would cost PLN 42,000. Asking only whether the company bought as cheaply as possible cannot establish the hedge's effectiveness: its purpose was to know the cost in advance. Fees and other contractual conditions are excluded; all figures are hypothetical.

Speculation means accepting exchange-rate risk in the expectation of profit. An investor can open a position without an invoice to pay or a need to hold the currency. An adverse rate move causes a loss. The instrument's name alone does not establish the purpose: both spot and derivatives can serve different needs. BIS [5] distinguishes hedging and speculative uses.

Currency risk also affects savings, foreign-currency debt payments and the cost of imported goods. Not every overseas payment requires a new exchange: someone who already holds euros and transfers them to a recipient accepting euros may avoid conversion. The role of Forex in the global economy develops these applications.

Rates also affect money you are not trading

Exposure to a currency means its rate affects funds held, an obligation or a future cash flow. It does not require a brokerage account. Consider two hypothetical cases: someone with a EUR 400 payment needs PLN 1,720 at 4.30 and PLN 1,760 at 4.40; a Polish exporter receiving EUR 10,000 converts it into PLN 43,000 at 4.30 or PLN 42,000 at 4.20. Fees are excluded. The rate move has opposite consequences for the payer and the recipient of euros.

In both cases, a payment or receivable creates the risk. A speculator may instead deliberately create a new exposure in anticipation of a rate change. A rise in EUR/PLN is therefore not “good” or “bad” for everyone: the consequence depends on which currency someone holds or must deliver. RBA [1] describes the effect on overseas purchases and debt service. These calculations show only direct conversion, rather than the full effect on prices in an economy.

OTC markets and exchanges: where transactions are agreed

The main part of the foreign exchange market operates off exchange, in an OTC network, short for over-the-counter. Banks and other price providers transact with clients and with one another. They can use electronic platforms, telephone calls and other channels. An electronic screen showing prices does not establish that a transaction takes place on an exchange.

There is no single global order book covering all Forex. A particular trading system may have its own book, showing only orders available within that system. Providers can quote different prices to different clients. Timing, transaction size and conditions matter. A rate from one information service does not guarantee a price available to every client. The International Monetary Fund (IMF) [2] describes this market structure.

Trading in the main segments takes place almost around the clock on business days, with a weekend break. A particular product may have narrower hours. The Australian Foreign Exchange Committee, hosted by Australia's central bank [14], describes the trading week; the lesson on the market across the day covers time zones.

A network of participants, rather than a ladder for every order

In wholesale markets, both banks and specialised non-bank firms supply prices. A corporation or fund can transact directly with a bank or use a platform gathering several offers. A bank can retain some risk, offset clients' opposing needs or enter into a separate transaction with another provider. There is no mandatory route followed by every exchange. BIS [20] describes this range of channels.

Access requires more than a price screen. Participants establish whom they can trade with, which amounts are acceptable and the conditions for delivering currencies. A price offered to a large institution is therefore not automatically an offer for someone buying EUR 100. Differences cannot be reduced to a rule that a “higher layer always gets a better rate”: size, credit, service, costs and execution time all matter. The market participants section develops the roles of the different groups.

Competition and the ability to enter offsetting transactions help limit price discrepancies, but do not guarantee identical quotes. Arbitrage—using an executable price difference—requires access to both offers and allowance for fees, timing and risk. Merely seeing two different numbers on screens does not establish an available profit. [20]

How orders contribute to price formation

A dealer does more than pass on a number from an external screen. By offering to buy and sell, it takes exposure to exchange rate changes and non-performance. Incoming orders, known as order flow, reveal which currencies and amounts its clients want to exchange. If euro purchases predominate for a time, the dealer may adjust quotes or hedge the resulting exposure. Other providers respond to their own orders and available information. Prices form across connected venues and relationships, rather than in a single computer setting a rate for the world. BIS [20] describes the role of dealer channels and platforms in price discovery.

Consider a model in which one bank client buys EUR 2 million while another sells EUR 1.6 million around the same time. The bank can offset matching needs, leaving EUR 0.4 million to manage separately. This illustrates internalisation, without assuming that every opposing order is automatically matched. The bank remains a party to its client agreements and responsible for their performance. Any external hedge it enters is a separate transaction. It does not establish that the client has itself transacted with another bank.

A chart or volume figure on one platform therefore cannot show all participants' decisions. Many transactions may be agreed bilaterally. Electronic order books, meanwhile, allow participants to observe offers within those venues. Both channels contribute to price discovery, but each provides only part of the picture.

A tight spread does not imply unlimited size at one price

The spread measures the distance between prices; depth measures available amounts at successive levels. Assume a hypothetical, static book of EUR/USD sell offers. The best bid is 1.0850 and best ask 1.0851 USD per EUR, giving a one-pip top-level spread. The buyer wants EUR 50 million, but only EUR 5 million is available at the best ask.

The weighted average price is USD 54,265,500 ÷ EUR 50,000,000 = 1.08531 USD/EUR. Compared with an assumed full execution at 1.0851, the buyer pays USD 10,500 more: a difference of 2.1 pips across the entire amount. This is not an extra commission, but the result of executing portions at different prices. The model assumes every offer remains available and executable; live offers can change or be subject to credit restrictions.

Using several levels is commonly called sweeping the book. Slippage compares a reference price with execution. Market impact concerns the order's own effect on prices and providers' behaviour. This static table demonstrates the cost of moving through levels, rather than proving a lasting shift in the entire market. The distinction also matters for smaller orders when liquidity is limited. The lesson on market operation follows an order in detail.

What an intermediary can do after receiving an order

A person exchanging currency at a bank receives that bank's service and offer. A corporate treasurer can request prices from several dealers for the same invoice. A fund can use a multi-bank platform, while a specialised institution may obtain access through a prime broker. These situations should not be combined into a mandatory chain of “client → broker → bank → exchange”. They differ in product, counterparty and credit conditions.

For a CFD, the client contracts with the entity identified in the account documentation. The broker may manage exposure internally, hedge a portion or use an external execution provider. Labels such as STP, ECN and NDD do not by themselves establish the legal counterparty or how a complaint will be handled. Check the agreement, order execution policy and fee schedule. The broker's hedging method does not turn a CFD into a deliverable currency purchase. [7]

Why an OTC market is useful to a business

A company rarely needs currency in an exactly round amount on the expiry date of an exchange contract. Its invoice may be for EUR 37,850, payable in 47 days. This hypothetical situation illustrates the value of an agreement negotiated off exchange: the company and bank can agree an exchange for the particular amount and date. CME [17] describes this ability to tailor a forward.

Suppose, solely for this example, that the company enters a deliverable forward: in 47 days it will buy EUR 37,850 at PLN 4.35 per euro. Its agreed cost is PLN 164,647.50. The euro amount matches the invoice and delivery matches the payment need. Using contracts of standardised size and maturity would leave the company to address the matching separately; one contract may not replicate the invoice exactly. This does not mean futures cannot be used for hedging. The distinction concerns contract design, rather than a division into instruments “for businesses” and “for speculators”.

Tailoring does not mean unlimited choice. The bank must offer the instrument and accept the terms, and the client must understand the obligation. A forward is neither a forecast of the future rate nor a free right to choose whichever price proves better. In this model, the company pays the agreed PLN 164,647.50 even if the euro is cheaper on the payment date. In return, a higher market rate alone will not raise that cost. Uncertainty is exchanged for a defined obligation, assuming that both parties perform the agreement properly.

Matching a contract to a payment also involves execution choices. A large client can ask dealers to price the whole amount or spread execution over time. Limiting public disclosure of its intention may help manage market impact, but does not make the transaction invisible or guarantee unchanged prices. The provider knows the order it receives and may limit its offer or adjust its price. Client confidentiality and fair conduct matter regardless of channel.

Nor should “around-the-clock OTC” be contrasted with an exchange operating only during office hours. Electronic futures also have long sessions, but specific contracts and platforms have schedules, breaks and holiday calendars. A bank offering exchange through an app can apply its own hours and conditions. For payments, what matters is not only the ability to click, but the available price, delivery date and operation of payment systems in both currencies.

Exchanges trade specific currency contracts

Derivatives exchanges operate alongside the OTC market. They offer products including currency futures and options. The exchange defines a contract's standard, and its price forms within that exchange's trading system. It is not a common price for every currency transaction worldwide. CME currency contracts [3] are one example.

The OTC/exchange distinction describes how trading is organised. It does not by itself determine whether a product is suitable or safe. A clearinghouse manages counterparty risk in exchange contracts but does not eliminate exchange-rate risk. Collateral requirements can also apply to OTC instruments. The lesson on how Forex works today develops market mechanics.

What a clearinghouse does

In central clearing, a central counterparty, or CCP, steps between the parties. It becomes buyer to sellers and seller to buyers. Clients access this arrangement through an intermediary and clearing member. A participant therefore does not rely solely on the solvency of an anonymous person on the opposite side of the original trade. CME Clearing [18] explains the mechanism.

The clearinghouse requires collateral and settles changes in position value. In a hypothetical example, one participant must pay PLN 500 following a change in contract value, while another is due PLN 500. Central clearing organises these obligations under the system's rules; one party's gain does not disappear merely because the original seller or buyer changes their mind. PLN 500 is only an illustration, unrelated to the specification of any particular futures contract. At CME, value changes are settled at least daily, and collateral and other resources manage default risk. This does not promise the absence of risk: the CCP manages risks of its own, and losses from adverse price changes remain the participant's responsibility.

The place where a trade is agreed and the way it is cleared are separate matters. CME Clearing also handles selected OTC products, including non-deliverable currency forwards. An off-exchange trade may therefore be centrally cleared. Clearinghouse risk and price risk still require separate assessment. [18]

This comparison uses the IMF's OTC description [2], CME's futures standard [3] and forward customisation [17], and CME Clearing's account of central clearing [18]. Provider regulation and duties require separate checks; trading location alone does not determine them.

A screen, an exchange and clearing are different features

The old distinction “telephone means OTC, screen means exchange” cannot describe today's market. An OTC platform can match offers electronically and display its own order book. Conversely, a selected off-exchange agreement can be centrally cleared. Electronic order entry, the place where an agreement is concluded and the entity managing its obligations answer three separate questions. [20] [18]

Technologies may look similar, but a client's rights do not follow from an interface's appearance. There is no need to declare that the boundary between OTC markets and exchanges has “disappeared”. Identifying the instrument, execution venue and clearing arrangements is enough. This distinction also explains why an exchange contract on a rate and a bank's euro exchange do not become the same product when both move onto a phone.

Hybrid infrastructure does not erase contractual differences

Electronification allows OTC and exchange markets to use similar screens and technology. One concrete example is CME FX Spot+, launched for trade date 14 April 2025. It connects access to OTC spot and futures liquidity through FX Link, an instrument representing the difference between their prices. Connecting liquidity does not make spot a futures contract or move all Forex onto one exchange. The operator's description is used here to explain the mechanism, rather than recommend the platform. [22]

Post-crisis reforms of OTC derivatives are a separate development. Their scope depends on jurisdiction and product. In the United States, the Treasury determination of 16 November 2012 exempted specified deliverable FX swaps and forwards from mandatory central clearing and exchange trading, while retaining reporting and business conduct requirements. It did not extend the exemption to every FX derivative. Neither “OTC has no oversight” nor “all OTC goes to a clearing house after 2008” is an accurate rule. [23]

The useful distinction is between three questions: where was the price agreed, which contract was created and how will the obligations be performed? A new electronic channel can change the first answer without automatically changing the others. The history lesson develops Globex and electronification in detail.

A short map of foreign exchange instruments

The market includes several kinds of transactions. This map shows differences in their construction; it is not advice on choosing a product. A derivative is an agreement whose value depends on an underlying instrument—here, currencies or their exchange rate.

OTC instrument definitions: BIS [6]; futures: CME [3]; CFDs: the Polish Financial Supervision Authority (KNF) [7].

The importance of these structures is visible in the data: in April 2025, FX swaps accounted for approximately USD 4.02 trillion daily, or 42.2% of final BIS OTC turnover. Spot was approximately USD 2.95 trillion, or 31.0%. The large swap share explains why Forex should not be reduced to predicting the next chart movement: exchanging currency for a period also serves funding needs. An instrument's share does not establish every transaction's motive, however. The market-size lesson covers comparisons with 2022, revisions and other categories; this OTC table should not be added to a count of futures contracts. [4]

FX swap: a currency needed for a limited period

It is easier to understand an FX swap as two agreed exchanges than as another contract name. A participant may hold euros but need dollars for a month. The earlier exchange supplies USD; the later one reverses direction and returns EUR. Both legs form one agreement: the later exchange rate is not left to be determined next month. BIS [6] defines the two legs.

The participant obtains dollars for an agreed period, then delivers the specified USD amount and recovers euros. The USD 100 difference follows from the two hypothetical rates and EUR 100,000 amount. It is not a separate commission or a universal price for this financing. The example excludes additional fees and collateral terms. The first leg need not settle on the trade date: BIS also identifies structures with both dates in the future. Nor is an FX swap the same as the charge for holding a CFD position that brokers often call a “swap”. [6]

Currency swap: exchanging payment streams

A currency swap concerns payments in different currencies, including interest and, depending on the agreement, principal exchanges. It can align financing with the currency of business activity. In a simplified non-numerical model, a company owes debt payments in USD but earns revenue in EUR. The agreement may require it to pay agreed amounts in EUR to the counterparty and receive USD payments needed to service its debt. Unlike the earlier table, recurring interest payments matter, rather than only two exchanges of principal.

BIS describes currency swaps as usually longer agreements used, among other purposes, to align debt-related cash flows. A longer maturity alone does not turn an FX swap into a currency swap: the distinction primarily concerns the agreed payment types. Rates, dates and detailed obligations must be read from the contract. BIS [19]

In offers, “Forex” may describe spot, a product using margin, or a CFD. Currency trading with a margin deposit is sometimes called margin FX. This does not guarantee currency delivery: the Australian Securities and Investments Commission (ASIC) generally describes margin FX as a type of CFD, allowing speculation on rates without owning the underlying currency. This is a product description in that jurisdiction, rather than a definition of every offer worldwide. Identify the instrument and settlement arrangements from its agreement. ASIC [16]

CNY and CNH: one currency, separate markets

The renminbi illustrates why a currency's name does not guarantee a single rate. In quotations distinguishing the two markets, CNY refers to onshore renminbi in mainland China; CNH is the designation used for renminbi in the offshore market outside mainland China. Market access and liquidity differ. Flows between the markets face restrictions, so arbitrage does not eliminate every discrepancy. These are not two currencies issued by separate central banks. A study published by BIS in 2015 explains the mechanism. [25]

In that historical study, onshore USD/CNY was subject to a daily ±2% band around the central parity rate; its footnote dates the widening to 17 March 2014. This is not a limit for every renminbi pair or for the CNH rate. In a model with central parity of CNY 7.00 per USD, a band of that width gives 6.86–7.14. This is simply arithmetic illustrating the rule described for that period, rather than today's parity or an offer.

Stress can widen the pricing gap. BIS described such divergences in early 2016 alongside sharp changes in offshore funding costs. This does not produce a simple buy or sell signal. The client should establish whether an instrument references CNY, CNH or a particular fixing. A CFD labelled USD/CNH remains a contract governed by the broker's terms; the symbol alone does not provide access to a deliverable onshore transaction. [26]

The underlying market and the client's product: do you receive currency?

“EUR/PLN” identifies a pair, rather than the entire agreement. The table distinguishes a rate as a reference from a client's contractual rights.

Definitions and settlement boundaries follow BIS classification [6], CME futures rules [3] and KNF's CFD explanation [7]. Currency purchases and CFD positions create different rights, even if the same pair appears on the screen.

A CFD is complex and can cause a loss. Protections for a particular client category do not make it a safe substitute for currency exchange. Margin and leverage are developed in the leverage and margin lesson; broker offer conditions belong to choosing a Forex broker.

CFDs and futures: similar exposure, different terms

A reference to EUR/USD is not enough for a fair comparison between CFDs and futures. Check contract size, maturity, financing, closure and final settlement, market data and intermediary fees. The account provider and legal protections also matter. A CCP in the futures model does not replace every obligation that the broker owes its client.

CME specifies Micro EUR/USD at EUR 12,500, one tenth of the standard EUR 125,000 Euro FX contract. The minimum price increment for Micro EUR/USD is 0.0001 USD/EUR: one such increment changes contract value by 12,500 × 0.0001 = USD 1.25. Its size is small relative to the standard future, but “micro” does not mean low risk for every account. Exchange rate movements still affect the full notional. [24]

Margin is collateral, rather than the value of currency bought for cash. Assume a CFD model with EUR 10,000 notional, a rate of 1.10 USD/EUR and an assumed notional-to-margin ratio of 30:1. Exposure is USD 11,000 and margin approximately USD 366.67. A decline worth 1% of notional produces a USD 110 loss, approximately 30% of that margin before costs. This model does not describe a legal limit, current offer or forced close-out point: other account funds and close-out rules matter separately. A correct directional forecast may be insufficient if funds run out before the position can be maintained.

ETF shares and instruments inside a fund

Exchange-listed fund shares can provide another route to exposure. The trading venue for a share does not determine the portfolio's components: it can hold currencies or specified derivatives. An ETF, another form of ETP and a retail CFD have different structures. Read the prospectus instead of deciding from an abbreviation in the name. The US SEC explicitly distinguishes registered funds from other exchange-traded products that may commonly be called ETFs. That US classification is not applied here to every country. [27]

Buying shares with your own funds does not itself open a margined CFD. Broker financing of the account and leverage within the product are separate matters. Some leveraged ETFs use swaps, futures and other derivatives; their daily objective does not promise an identical return multiple over longer periods. Exchange trading does not remove the need to understand those terms. [28]

Risk has several sources

Exchange-rate risk means a price change worsens a result or payment cost. Counterparty risk concerns the other party's failure to perform. Settlement risk arises when delivering currencies: one party may have paid before receiving the other currency. Operational errors, outages and the need to supply collateral on time add further risks. They are connected but not synonymous. Basel Committee guidance [21] distinguishes them.

A CCP limits and organises default risk in the contracts it handles; it does not guarantee a favourable rate. Payment-versus-payment (PvP) links delivery of both currencies; it neither determines prices nor performs the CCP's role. Collateral or margin requires funds when due, even if the transaction's economic purpose was reasonable. An honest comparison cannot assign “risk only to OTC” and “safety only to exchanges”. The lesson on execution and settlement explains these distinctions. [21]

Client loss statistics require equally precise scope. In the Polish supervisory authority UKNF's report for 2025, 72.2% of the surveyed clients of domestically supervised entities recorded losses, covering Polish and foreign residents and excluding zero results. The report covers OTC derivatives, rather than currency pairs alone. It does not describe every Forex participant or the probability of loss on a particular trade. It provides context for speculative risk, rather than a judgement about every individual. The myths lesson develops the denominators and historical scope of ESMA warnings. [29]

A later move in the expected direction does not guarantee profit either. In a hypothetical model, you buy a CFD with EUR 100,000 notional at an ask of 1.1000 USD/EUR. The stop is triggered when its bid condition of 1.0980 is met, but the sale executes at 1.0978. The price-difference result is −USD 220 before commission and financing. A subsequent rise to 1.1020 does not change the already realised loss. This is an assumed path, rather than typical slippage or evidence of manipulation. Trigger conditions, execution and funds needed to maintain a position matter alongside the forecast.

Master agreements, collateral and netting

OTC markets do not rely solely on trust in a bank's name. Master agreements, such as ISDA, establish common terms for a set of transactions. Collateral documentation can define eligible assets, valuation, transfer deadlines and dispute procedures. Payment netting reduces amounts to transfer, whereas close-out netting determines a single balance after covered contracts are terminated, for example following default. Effectiveness depends on law and documentation; using the ISDA name does not guarantee recovery. [21]

In a model, following contractual termination of two contracts, one party has a USD 100,000 receivable and a USD 70,000 payable. If enforceable close-out netting covers both, the net receivable is USD 30,000. This compares termination values in one currency, rather than subtracting EUR 100,000 notional from USD 70,000. It excludes enforcement costs and changing valuations over time. A smaller exposure balance is not a promise to recover the full USD 30,000.

Cash collateral can limit the counterparty's exposure while increasing the other party's immediate funding needs. With a hypothetical contract value of −USD 20,000 and a requirement to cover that value fully, without thresholds or existing collateral, USD 20,000 must be delivered. A business may still expect export proceeds next month, while the collateral payment is due now. Distinguish the overall economic result of a hedge from cash availability on the day of a call.

These mechanisms explain why a division into “risky OTC” and “safe exchanges” is inadequate. Documentation, collateral, central clearing and PvP address different problems. None eliminates adverse price changes or every operational failure. The history and market mechanics lessons develop historical events and their effects on liquidity.

The spread, commission and contract result

Comparing products also requires comparing costs. In ordinary currency exchange, the spread can be embedded in a bank's or exchange provider's two rates, while a separate fee increases the final cost. A speculative contract can add commissions and financing for holding a position. Slippage is the difference between a reference price and execution; it can be adverse or favourable and is not automatically a separate tariff item. A CFD financing charge labelled “swap” does not mean an institutional FX swap has been entered into.

The model assumes no price change beyond the fixed bid/ask difference, no slippage and no conversion from USD into the account currency. It does not describe a current tariff or required margin. It shows why an advertised “one pip” does not fully answer the cost question, and why it matters whether commission is quoted per side or for the round trip. The spreads, commissions and swaps lesson develops the calculations. KNF [7] describes CFD construction and costs.

A checklist for a specific offer

Work through these four questions for the offer you are considering. Record the answers for your chosen amount, direction of exchange and date.

1. Subject of the agreement: will you receive currency in an account or cash, or only the result of a derivative?
2. Direction and convention: which currency are you buying, which are you paying in, and are you using the appropriate bid or ask?
3. Time and conditions: when was the rate observed, for what amount is it available, and when does settlement occur?
4. The complete price: what will you ultimately pay or receive after fees specified in the offer?

The next lesson, how the Forex market emerged, covers its history. Forex myths and facts addresses common misunderstandings.