FOreign exchange market

Essay by grr1 May 2004

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The Foreign Exchange Market


1. Value Date:

The settlement of a transaction takes place by transfers of deposits between two parties. The day on which these transfers are effected is called the Settlement Date or the Value Date.

2. Spot Rate:

When the exchange of currencies takes place on the second working day after the date of the deal, it is called spot rate.

3. Forward Transactions:

If the exchange of currencies takes place after a certain period from the date of the deal (more than 2 working days), it is called a forward rate. A trader may quote a forward transaction for any future date. It is a binding contract between a customer and dealer for the purchase or sale of a specific quantity of a stated foreign currency at the rate of exchange fixed at the time of making the contract.

4. Swap Transaction:

A swap transaction in the foreign exchange market is combination of a spot and a forward in the opposite direction.

Thus a bank will buy DEM spot against USD and simultaneously enter into a forward transaction with the same counter party to sell DEM against USD against the mark coupled with a 60- day forward sale of USD against the mark. As the term 'swap' implies, it is a temporary exchange of one currency for another with an obligation to reverse it at a specific future date.

5. Bid Rate:

The bid rate denotes the number of units of a currency a bank is willing to pay when it buys another currency.

6. Offer Rate:

The offer rate denotes the number of units of a currency a bank will want to be paid when it sells a currency.

7. Bid - Offer Rate:

The bid offer Rate is the rate which states both,