Financial Management · The nature and role of money markets

Foreign Exchange and Eurocurrency Markets for ACCA Financial Management

Updated 11 October 2026 · Fact-checked

The foreign exchange market is where currencies are bought and sold. The Eurocurrency market is where banks take deposits and lend in a currency outside its home country, such as US dollars held in London. Firms use both to pay bills, borrow, invest surplus cash and manage currency risk.

Understand Foreign Exchange and Eurocurrency Markets

The foreign exchange (forex) market is where one currency is swapped for another. It has no single location. Banks, companies, governments and dealers trade by phone and screen, around the clock. Most trade is in spot deals (settled within about two working days) and forward deals (settled on an agreed future date at a rate fixed today).

A firm uses forex when it imports, exports, invests abroad or repays foreign debt. A quote such as $1.25 = £1 tells you the price of one currency in terms of another. Banks quote two rates: they buy the base currency at one rate and sell it at a less favourable rate. The gap is the spread, and it is the bank's profit.

The Eurocurrency market is a different idea. A Eurocurrency is a deposit held in a bank outside the country where that currency is issued. US dollars deposited in a London bank are Eurodollars. The word 'Euro' here is historical and has nothing to do with the euro currency. Any currency can be a Eurocurrency, such as yen held in Singapore.

This market is wholesale: deposits and loans are large and mostly short to medium term. It is lightly regulated, so banks avoid some reserve requirements and can offer finer interest margins. Borrowers often get cheaper loans and depositors slightly better rates than in the domestic market. Rates are usually linked to a benchmark floating rate plus a margin.

Do not confuse this with Eurobonds. A Eurobond is a longer-term bond issued in a currency other than that of the country where it is sold, usually to international investors. That is a capital market instrument. Eurocurrency loans and deposits belong to the money market. Firms borrow in the Eurocurrency market to match currency income, to raise large sums quickly, or to get lower cost funding.

Key rules to remember

Bank quote convention: Quote = Base currency 1 = Variable currency: Bid (bank buys base) / Offer (bank sells base); The bank always gets the better of the spread. Customer sells base currency at the lower rate and buys it at the higher rate.
Converting from base to variable currency: Variable amount = Base amount × rate; Multiply when moving from the base currency to the variable one.
Converting from variable to base currency: Base amount = Variable amount ÷ rate; Divide when moving from the variable currency back to the base.
Spread: Spread = Offer rate − Bid rate; Often expressed as a percentage of the rate. It is the dealing cost.
Eurocurrency definition: Eurocurrency = deposit or loan in a currency held outside its home country; Short to medium term, wholesale, lightly regulated. Eurobonds are the long-term bond equivalent.

How to solve Foreign Exchange and Eurocurrency Markets questions

Exam questions on this topic are either conversion calculations or short explanations. Use this method for both.

1Identify what is being asked: a conversion, a cost of borrowing comparison, or a description of a market or instrument.
2For conversions, write the quote and mark which currency is the base (the one with 1 unit).
3Decide whether the bank is buying or selling the base currency. Use the bid if the bank buys it and the offer if the bank sells it.
4Check the direction. Base to variable means multiply. Variable to base means divide.
5Do the calculation and state the currency of your answer.
6For explanation questions, separate money market (Eurocurrency loans and deposits) from capital market (Eurobonds).
7Link the answer to the firm: reason for use, such as cheaper funding, currency matching or large sums.
8Sense-check: the customer should always get the worse side of the spread.

Quickest way: Bid-offer in ten seconds

When to use it: Any objective test question that asks you to convert currency using a two-way quote.

Say it aloud: the bank buys the base at the lower number and sells at the higher number.
Ask: does the customer sell or buy the base currency? Customer sells uses the lower rate. Customer buys uses the higher rate.
Multiply to go to the variable currency, divide to go to the base.
Eliminate options that use the wrong side of the spread. Usually two of four fall away at once.
For concept questions, remember: Eurocurrency means outside home country, loans and deposits. Eurobond means long-term bond.

Common mistakes in Foreign Exchange and Eurocurrency Markets

Thinking Eurocurrency only means euros or only European banks.
The name sounds like the euro currency.
Fix: Remember it means any currency held outside its home country. Eurodollars can be held in London, Singapore or elsewhere.
Using the wrong side of the bid-offer spread.
Students think from the customer's side instead of the bank's side.
Fix: Decide what the bank does with the base currency. Bank buys at the lower rate, sells at the higher rate.
Multiplying when you should divide.
The quote direction is not checked.
Fix: Underline the base currency. Base to variable multiply. Variable to base divide.
Confusing Eurobonds with Eurocurrency loans.
Both use the word 'Euro' and both are international.
Fix: Eurocurrency is short to medium term bank lending and deposits (money market). Eurobonds are long-term tradable bonds (capital market).
Saying the Eurocurrency market is unregulated.
It is often described as lightly regulated.
Fix: Say 'less regulated than domestic markets', not 'unregulated'. Banks still follow the rules of their own jurisdictions.

Worked examples

Example 1

A UK company must pay a US supplier $250,000 today. The bank quotes $1.2500–$1.2600 per £1 (bid–offer for sterling). How many pounds does the company need to buy the dollars?

Show the solution

The base currency is £. The bank buys £ at $1.2500 and sells £ at $1.2600.
The company needs to buy dollars, which means it sells pounds to the bank.
The bank buys pounds, so use the lower rate of $1.2500.
Pounds needed = $250,000 ÷ 1.2500 = £200,000.

Answer: £200,000

Example 2

A US company with surplus cash of $4,000,000 deposits it in a London bank rather than at home. Another firm borrows the same funds for a project. Explain what the market is and give two reasons why the borrower may choose it.

Show the solution

Dollars held in a bank outside the US are Eurodollars. The deposit and loan together form part of the Eurocurrency market.
It is a wholesale money market for large sums, usually short to medium term.
Reason 1: lighter regulation lets banks work on finer margins, so borrowing may cost less than in the domestic market.
Reason 2: large amounts can be raised quickly, and borrowing in dollars can match the firm's dollar income, which reduces currency risk.

Answer: The deposit is a Eurodollar deposit in the Eurocurrency market. The borrower may choose it for potentially cheaper funding and for large, quick, currency-matched finance.

Exam tips

In objective test questions, check which currency is the base before touching a calculator. Wrong-direction answers are always among the options.
Learn the one-line definitions: forex is currency trading, Eurocurrency is a deposit or loan outside home country, Eurobond is a long-term international bond.
In constructed response answers, link each point to the firm in the scenario, such as currency matching with foreign income.
Show the rate chosen and why (bank buys or sells base). Even if arithmetic slips, method can earn marks in Section C.
Remember objective test questions score all or nothing, so read all four options before choosing.

Practice questions from The nature and role of money markets

Foreign Exchange and Eurocurrency Markets: frequently asked questions

What is the Eurocurrency market?

It is the market for bank deposits and loans in a currency held outside the country that issues it, such as US dollars held in London. It is wholesale, mainly short to medium term and lightly regulated.

How do companies borrow in the Eurocurrency market?

They arrange a loan, often a large bank loan, in a chosen currency from a bank outside that currency's home country. The interest rate is usually a floating benchmark plus a margin. Firms do this to raise large sums, match currency income or get cheaper funding.

What is the difference between Eurobonds and Eurocurrency?

Eurocurrency refers to bank deposits and loans held outside the home country of the currency. Eurobonds are longer-term bonds issued in a currency different from the market where they are sold. The first is a money market idea and the second is a capital market instrument.

Why is there a bid and an offer rate in the foreign exchange market?

The bank buys the base currency at the bid rate and sells it at the higher offer rate. The difference, the spread, is the bank's reward for dealing. Customers always deal on the less favourable side.