What happens to your money when you buy something priced abroad?
The oldest reason for the FX market is the simplest one: somebody wants to buy something that is priced in a currency they do not have. Follow that transaction carefully and you have already understood a large part of how currencies move around the world.
The importer and the exporter
A UK retailer buys €2,000,000 of goods from an Italian supplier. The invoice is in euros. The retailer holds pounds. So before it can pay anyone, it must buy euros and sell pounds.
At EUR/GBP 0.8600 — one euro costs 0.86 pounds — that invoice costs:
2,000,000 × 0.8600 = £1,720,000.
On the other side, the Italian supplier receives euros it can use at home and never has to touch the FX market at all. Notice the asymmetry: whoever is not invoicing in their own currency carries the currency problem. Which currency an international contract is written in is therefore a negotiation in itself, not a technicality.
The exposure nobody signed up for
Suppose the invoice is payable in 90 days and, over that period, EUR/GBP moves from 0.8600 to 0.8800.
The same goods now cost: 2,000,000 × 0.8800 = £1,760,000.
That is £40,000 more — about 2.3% — for a shipment whose price never changed, from a supplier who did nothing, in a contract that was already signed. The retailer's margin moved because a market it never intended to participate in moved.
This is called transaction exposure, and it is why treasurers at import-heavy companies watch FX screens: not because they have a view on the euro, but because their profit accidentally does. The instruments they use to fix the rate in advance — forwards, mainly — belong to a later course. What matters here is why the demand for them exists.
Tourism: the same market, a very different price
When you change money for a holiday, you are doing exactly what the retailer did, in miniature. But look at the price you are offered.
If the market rate is EUR/GBP 0.8600, an airport bureau might sell you euros at an effective 0.8950 and buy them back at 0.8250. That is a spread of several percent around the wholesale rate — where the interbank market's spread on the same pair is a small fraction of one percent.
Nobody is cheating you. You are simply standing at the far end of a tiered market: the bureau bears cash-handling costs, staffing, and the risk of holding notes it may not sell for days, and it serves customers who trade tiny amounts. The bank, the fund and the tourist all trade the same pair; they trade it at very different prices because they occupy different tiers. Unit 4 takes that structure apart properly.
The scale point worth keeping
Trade and travel are the original reason for FX — and today they are a small share of the daily volume. Real-economy flows are counted in the low single-digit percentages of global turnover; the rest is financial. Yet those small flows are permanent, involuntary and continuous, which makes them the market's floor rather than its noise.
Try it now
- Twelve months of the euro against the pound is below. Measure from the highest point to the lowest and write the difference down in decimals, not percent. Multiply it by €2,000,000: that is what a year of currency movement would have done to the same invoice, expressed in cash.
- Now read the percentage the same measurement gives you. FX ranges look small in percent and large in money, and both impressions are correct — which is why an importer hedges a number and a tourist does not.
- Next time you pass a bureau's board, compare its buy and its sell price against the rate on this chart. You are looking at the distance between two tiers of one market — an observation about structure, not a complaint about pricing.