This lesson examines the structure of the foreign exchange market, the mechanics of currency trading, and the theories underpinning exchange rate movements.

2.1 The Structure of the FX Market
The foreign exchange market is the largest financial market in the world, operating 24 hours a day across global financial centres. Key participants include commercial banks, central banks, multinational corporations, and institutional investors .

2.2 Spot and Forward Markets
The spot market involves immediate delivery of currencies (typically T+2 settlement). The forward market involves contracts to exchange currencies at a predetermined rate on a future date. Understanding spot and forward quotations, cross rates, and bid-ask spreads is fundamental to treasury operations .

2.3 Exchange Rate Theories
Key exchange rate determination theories include Purchasing Power Parity (PPP), Interest Rate Parity (IRP), and the Fisher Effect. These theories link exchange rates to inflation differentials, interest rate differentials, and nominal interest rates .