The ratio between currencies of two countries, representing the relative value of one with respect to the other is called the currency exchange rate. When currency exchange rate is represented as EUR/USD = 1.5234 it means to buy 1 Euro you need $1.5234 at that time. Time is an important parameter or factor for currency exchange. The above example may be treated as spot rate of currency exchange; similarly, there are forward exchange rates. The financial market of currency is known as the forex market. Trading of various currencies and future contracts of currencies are traded here much like in the stock market.

Rates of currency exchange established by the process of trading is called ‘nominal exchange rate' that is corrected or modified by considering the inflation factor to derive ‘real exchange rates.' Higher the inflation of a country, lower the value of its currency. Political stability and interest rates are other factors influencing currency exchange. Speculative trading, economic forces and market trends are responsible for constant fluctuation of currency exchange rates. Professional expertise and guidance is required to sail smoothly through this.

There are four types of currency exchange transactions:

1. Spot Contract: When you wish to buy currency at existing currency exchange rate at a particular time and the necessary payment should be made within two working days of the transaction, you are going for a spot contract. This type of contract is undertaken for urgent requirements like travel expenses, making advance payment or booking property and usually involves small amount of transaction.

1. Forward Contract: This is the most widely used process by large business houses that span over different countries and are involved in huge sums of foreign currency transaction. At personal level, you can use this type of contract to secure your future payment of overseas property.

Future currency contract is undertaken by fixing the currency exchange rate now for a definite date from 1 to 24 months. As for example, you have to pay the final payment for your home abroad after 9 months that is equivalent to £200,000 at existing exchange rate and your adviser suggests that a fall in value of your currency during the period is expected. To fix the exchange rate and secure yourself from future loss you may go for future contract now by depositing at least 10% of the amount (margin deposit) and the balance on or before maturity of the contract.

1. Time-Option Forward Contracts: This type of future contract of currency exchange offers more flexibility of payment. They are useful when you do not know the exact date of requirement and have only an idea which would vary by few months. Say, for example, a developer tells you that your property would be delivered by May 2011. With the advice of your dealer you may set a date of time option forward contract of August 2011 and you are free to settle the contract anytime before that without penalty.

Limit Order Contracts: This type of contract allows you to settle the currency exchange rate at which you want to buy your currency. Your agency would monitor the market on your behalf and inform you about the purchase at your desired rate. Payment should be made within two days.

Article Source: http://www.ArticleBlast.com