2) briefly explain the types of foreign exchange transactions.
Answers
Answer:
The Foreign Exchange Transactions refers to the sale and purchase of foreign currencies. Simply, the foreign exchange transaction is an agreement of exchange of currencies of one country for another at an agreed exchange rate on a definite date.
Explanation:
Types of Foreign Exchange Transactions
SPOT TRANSACTIONS
This method of transaction is the fastest way to exchange currencies. Spot transaction refers to the exchange or settlement of the currencies by the buyer and seller within two days of the deal without a signed contract. The Spot Exchange Rate is the prevailing exchange rate in the market.
FORWARD TRANSACTIONS
Forward transactions are future transactions when the buyer and seller enter into an agreement of purchase and sale of currency after 90 days. The agreement is framed on the basis of a fixed exchange rate for a definite date in the future. The rate at which the deal is fixed is termed as Forward Exchange Rate.
FUTURE TRANSACTION
Future transactions also deals with contracts in the same manner as forward transactions. However, in case of future transactions, standardized contracts in terms of features, date, and size should be followed. Whereas, regular forward transactions have flexibility and can be customised. In future transactions, an initial margin is fixed and kept as collateral in order to establish a future position.
SWAP TRANSACTIONS
A simultaneous lending and borrowing of two different currencies between two investors are referred to as swap transaction. One investor borrows a currency and repays in the form of a second currency to the second investor. Swap transactions are done to pay off obligations without suffering a foreign exchange risk.
OPTION TRANSACTIONS
The exchange of currency from one denomination to another at an agreed rate on a specific date is an option for an investor. Every investor owns the right to convert the currency but is not obligated to do so.