– Spot rate is the basis for which a given currency may be exchanged for another on that day.
– A forward rate is the going price for exchanging between currencies at some future time.
– By entering into a forward exchange contract, a trader commits to purchase or sell an amount of currency at a fixed price and time, in the future.
– The buyers and sellers of forward exchange contracts are company’s seeking to avoid the risk of exchange rate fluctuations, or to hedge such transactions.
– The forward exchange market can also be used to speculate in exchange rates also, this is where one commits to purchase a currency but has no future dollar inflow expectations.
– If a given currency is selling at a higher forward rate than spot rate it is said there is a forward premium on it, if lower it is called a forward discount.
0 Comments