So far we’ve treated FX as buying one currency for another right now. But when you settle is itself a choice — and it gives rise to the three core FX instruments.
Spot
A spot trade is the everyday case: you agree a rate and settle almost immediately (within a day or two) at today’s spot rate. It’s what a quote like EUR/USD 1.08 refers to by default. Simple, immediate, done.
Forwards
A forward lets you agree today on an exchange rate for settlement on a future date — next month, next year. Nothing changes hands now; you’ve simply locked the rate. This is the hedging workhorse from the previous tier: the company expecting €1m in three months uses a forward to fix its dollar value today.
The forward rate isn’t a forecast — it’s the spot rate adjusted for the interest-rate difference between the two currencies (otherwise you could borrow in one, lend in the other, and arbitrage the gap).
FX swaps
An FX swap combines the two: you trade one way at spot and simultaneously agree to reverse it with a forward at a future date. It’s a way to move money between currencies temporarily — common among banks managing short-term cash. (Don’t confuse it with a currency swap, a longer-dated derivative covered in the Currency swaps & FX lesson.)
The takeaway
FX trades in three forms: spot (settle now), forward (lock a rate for later — the hedging tool), and FX swap (spot plus a reversing forward, to move currency temporarily). The forward rate is just spot adjusted for the interest-rate gap. (This is education, not investment advice.)