FX · X1 · 7 min
The FX market
Turn foreign money into pounds, see how a moving exchange rate changes a company’s profit, and know what a forward does.
In the news: “Sterling slid against the dollar”: why that matters to a UK company that is paid in dollars.
The essentials
- Exchange rate
- The price of one currency in another. GBP/USD 1.25 means £1 buys $1.25, so dividing dollars by the rate gives pounds: $500,000 is £400,000.
- Who trades, and where
- Dealer banks quote prices to companies, investors and central banks. More than $9 trillion changed hands a day in April 2025, about 38% of it in the UK, as London’s day overlaps Asia’s and New York’s.
- Spot and forwards
- Spot exchanges currencies at today’s rate, usually settling two working days later. An fixes a rate today for a later date; the share of expected revenue a firm sells forward is its hedge ratio.
- FX swaps
- A spot trade and an opposite forward done together: in effect, borrowing one currency against another. FX swaps are the most traded FX product, about two-fifths of all turnover in 2025.
- Options and cross-currency swaps
- An FX option gives the right, not the duty, to exchange at a set rate, for a fee paid up front: it suits money that may never arrive. A cross-currency swap turns a loan in one currency into another for years.
Dollar revenue in pounds, part-hedged
£ = (h × R) ÷ F + ((1 − h) × R) ÷ S
- R
- the dollars the company expects to receive
- h
- the hedge ratio: the share sold forward
- F
- the forward rate agreed today (GBP/USD)
- S
- the spot rate when the money arrives
How it works
1. Changing one money for another
On holiday in New York you change £100 into dollars. If £1 buys $1.25, you get $125. Companies, investors and banks do the same thing on a vast scale: that is the foreign exchange (FX) market. Traders write this rate as GBP/USD 1.25, the price of one pound in dollars.
2. Converting back into pounds
A UK company is paid $500,000 by a US customer and needs pounds to pay its staff. At GBP/USD 1.25 it gets $500,000 ÷ 1.25 = £400,000. The rate is dollars per pound, so dollars divided by the rate gives pounds. A rate written the other way round, such as EUR/GBP 0.86 (pounds per euro), is multiplied instead: €100 is £86.
3. The rate moves, and so does the profit
Now say the money arrives in three months. If the pound strengthens to 1.30 by then, the same $500,000 buys only £384,615, about £15,000 less. Until a company converts its foreign money, its profit in pounds depends on the exchange rate.
4. Fixing the rate now: a forward
To take that risk away, the firm can agree today to sell its dollars in three months at a set rate, say 1.27. That deal is an : a rate fixed now for an exchange later. Many firms hedge only part of what they expect, because sales forecasts can be wrong; the share they hedge is the hedge ratio.
5. Spot and swaps
Exchanging currencies now is spot; the money usually changes hands two working days later. An does a spot trade and a forward together: buy a currency now and sell it back later at a rate fixed today. It is a way to borrow one currency against another, and it is the most traded FX product, about two-fifths of all trading in 2025.
6. Options and cross-currency swaps
An FX option gives the right, but not the duty, to exchange at a set rate, for a fee paid up front. It suits money that might never arrive. A cross-currency swap turns a loan from one currency into another for years: a UK company that borrows dollars with a five-year bond can turn its payments into pounds.
7. Who trades, and where
Dealer banks quote prices all day and earn the gap between their buying and selling prices. Companies, investors and central banks trade with them. More than $9 trillion changed hands a day in April 2025, and the UK handled about 38% of it, because London’s working day overlaps both Asia’s and New York’s.
Worked example
A UK manufacturer expects $10m from a US customer in three months. It sells 60% forward at 1.2700. When the money arrives, GBP/USD is 1.3200.
- Hedged dollars: 60% of $10m = $6m.
- Hedged pounds: $6,000,000 ÷ 1.2700 = £4,724,409.
- Unhedged dollars: $10m − $6m = $4m.
- Unhedged pounds: $4,000,000 ÷ 1.3200 = £3,030,303.
- Total: £4,724,409 + £3,030,303 = £7,754,712.
- With no hedge, all $10m at 1.3200 would have given £7,575,758: the hedge protected 60% of the revenue from the stronger pound.
About £7.75m, against £7.58m with no hedge.
Check yourself
7 quick questions on the explanation above.
Practice
New numbers every set. Misses and guesses go into your review deck.
In the interview
Answer out loud in under a minute, then compare.
Why would a UK exporter use FX forwards?
Which is the largest product in FX, and why?
Why is London the centre of FX trading?
Remember
£ value = $ amount ÷ GBP/USD
FX is a dealer market centred on London; a forward fixes a company’s home-currency revenue, but only for the share it hedges.
Sources
- Bank for International Settlements — Global FX trading hits $9.6 trillion per day in April 2025 and OTC interest rate derivatives surge to $7.9 trillion: Triennial Survey
- Bank of England — BIS Triennial Survey of Foreign Exchange and Over-The-Counter Interest Rate Derivatives Markets in April 2025
- Bank for International Settlements — OTC foreign exchange turnover in April 2025
Definitions and maths are standard textbook material; dated facts link to the sources above. Worked numbers are illustrative.