What are you actually agreeing to in a spot FX trade?
Buying a stock is simple to describe: cash goes one way, a security comes back. An FX trade has no security in it at all. Cash goes both ways. You are agreeing to deliver one amount of one currency and receive another amount of another currency, on an agreed date.
That single structural difference explains most of what follows in this course — the settlement convention, the reason the FX swap exists, and why the risk in FX is a different animal from the risk in equities.
The contract, spelled out
A spot EUR/USD trade at 1.0800 for 1 standard lot is this agreement:
- You pay USD 108,000
- You receive EUR 100,000
- Both, on the value date (the next lesson)
The base currency is the first one (EUR), the quote currency the second (USD), and the rate is how much quote currency one unit of base currency costs. A standard lot is 100,000 units of the base currency; a mini lot is 10,000, a micro lot 1,000. Interbank tickets routinely run to tens of millions.
Notice what you cannot do: hold a position in "EUR" alone. Every FX position is simultaneously long one currency and short another. There is no neutral cash leg to retreat to — only a different pair.
Pips, and what a pip is worth
A pip is the fourth decimal place, 0.0001, for most pairs. For pairs quoted against the Japanese yen it is the second decimal, 0.01, because the numbers are about two orders of magnitude larger.
Pip value = lot size × pip size, expressed in the quote currency:
- 1 lot EUR/USD: 100,000 × 0.0001 = USD 10 per pip
- 1 lot USD/JPY at 150.00: 100,000 × 0.01 = JPY 1,000 per pip ≈ USD 6.67
That second line is the one people get wrong. On a JPY pair the pip value is not fixed in dollars — it depends on the rate itself, and it changes as the rate moves.
What the spread costs, in money
A dealer quotes two prices. Say EUR/USD 1.08001 / 1.08009 — an 0.8 pip spread.
- Round-trip cost on 1 lot: 0.8 × USD 10 = USD 8
- As a share of the USD 108,000 notional: 0.0074%
That looks trivially small, and against the notional it is. Hold that thought until Unit 3, where the same USD 8 is measured against the deposit rather than the notional, and stops looking small.
Why the two-way cash flow matters
In an equity trade, if your counterparty fails you still have your cash, or your shares, or a claim on a clearing house. In a spot FX trade both sides send full principal, often into two different countries and two different time zones, hours apart. Get that wrong and the loss is not a price move — it is the entire amount. That risk has a name and a famous 1974 date, and it is two lessons away.
In the data
A daily FX price comes laid out like a share price, with an adjusted close and a volume, and neither means what it means for a share. Below is one Friday in July 2026 and the weekend after it.
The adjusted close equals the close, because a currency pays no dividends and never splits. The volume is not a count of the market, which nobody can take in an over-the-counter market: in this history it read zero on that busy Friday and was positive on the two quietest days of the week, and since 29 August 2026 every daily row has carried one (checked 29 September 2026). Spot really is just a price, and a volume column beside it is one vendor's sample, not the market's turnover.
Try it now
- Two majors are below. Read today's rate off each and find its pip: the fourth decimal on the euro pair, the second on the yen pair. That difference is not cosmetic; every calculation in this course starts from it.
- Compute the pip value of one standard lot in the quote currency, then the notional of that lot in the quote currency. Write both numbers down.
- Do it again on the yen pair. Confirm for yourself that the pip is 0.01, that the pip value is 1,000 units of JPY, and that its dollar value depends on the rate you just read. Two conventions, one market.