Distinguish between spot rate and forward rate
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In spot rate transaction the settlement of funds or delivery of currency takes place on the second working day from the day of contract while in case of forward rate transactions the settlement of funds or delivery of currency takes place on future date except spot date ( because that would be spot rate).
In spot rate there can be only one exchange rate whereas if forward there can be multiple exchange rates like 1 month rate or 2 month rate or 3 month rate and hence one has to be very careful while transacting in forward transaction in currency market.
Forward rate is always either higher or lower than spot rate and it is never same as spot rate because of various factors like time value of money, demand and supply of currency, risk free interest rate, presence of speculators and arbitrageurs and so on.
If the forward rate is more than spot rate then currency is said to be at premium that is currency will be more expensive in future whereas if forward rate is less than spot rate then currency is said to be at discount that implies currency will be cheaper in future.
In spot rate there can be only one exchange rate whereas if forward there can be multiple exchange rates like 1 month rate or 2 month rate or 3 month rate and hence one has to be very careful while transacting in forward transaction in currency market.
Forward rate is always either higher or lower than spot rate and it is never same as spot rate because of various factors like time value of money, demand and supply of currency, risk free interest rate, presence of speculators and arbitrageurs and so on.
If the forward rate is more than spot rate then currency is said to be at premium that is currency will be more expensive in future whereas if forward rate is less than spot rate then currency is said to be at discount that implies currency will be cheaper in future.
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