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,