Spot market

regarding the forex market SPOT MARKET AND FORWARD MARKET

1. SPOT MARKET & FORWARD MARKET

2. ORGANIZATION OF THE FOREIGN EXCHANGE MARKET Two Types of Currency Markets 1. Spot Market 2. Forward Market

3. SPOT MARKET In finance, a  spot contract ,  spot transaction , or simply  spot , is a contract of buying or selling  commodity , security or currency for settlement (payment and delivery) on the spot date, which is normally two business days after the trade date . The settlement price (or rate) is called  spot price  (or  spot rate ).

4. Participants by Market a . commercial banks b. brokers c. customers of commercial and central banks

5. Types of Spot Rates Bid Rate- one currency can be purchased in exchange for another Offer Rate- one currency can be sold in exchange for another

6. Types of Spot Deals Rand/USD deals USD/Foreign currency deals Rand/Foreign currency deals Foreign currency/Foreign currency deals

7. MECHANICS OF SPOT TRANSACTIONS SPOT TRANSACTIONS: An Example Step 1: Currency transaction: verbal agreement, U.S. importer specifies: a. Account to debit (his acct) b. Account to credit ( exporter)

8. Step 2: Bank sends importer contract note including: - amount of foreign currency - agreed exchange rate - confirmation of Step 1.

9. Step 3: Settlement Correspondent bank in Hong Kong transfers HK$ from importers account to exporter’s.

10. THE FORWARD MARKET Definition: “an agreement between a bank and a customer to deliver a specified amount of currency against another currency at a specified future date and at a fixed exchange rate”. often 30, 90, 180 days.

11. Participants a. A rbitrageurs b. Traders c. Hedgers d. S peculators

12. Types of Forward Rate Outright Forward Swap Forward

13. Outright Forward A forward currency contract with a locked-in exchange rate and delivery date . An outright forward contract allows an investor to buy or sell a currency on a specific date or within a range of dates . Foreign exchange forward contracts function is a very similar fashion to standard forward contracts.

14. For example: A French company that buys materials from a Chinese supplier may be required to provide payment for half of the total value of the payment now and the other half in six months. The first payment can be covered with a spot trade, but in order to reduce currency risk exposure, the French company locks in the exchange rate with an outright forward .

15. Swap Forward Is a simultaneous purchase and sale of identical amounts of one currency for another with two different value dates (normally spot to forward ).   Foreign Exchange Swap allows sums of a certain currency to be used to fund charges designated in another currency without acquiring foreign exchange risk. It permits companies that have funds in different currencies to manage them efficiently .  swap contract: swap contract is an agreement between two party to exchange a cash flow in one currency against a cash flow in another currency according to predetermine terms & conditions .

16. The difference between a forward contract and a swap is that a swap involves a series  of payments in the future, whereas a forward has a  single  future payment . Two most Basic Swaps are: Interest Rate Swaps Currency Swaps

17. SPOT vs FORWARD Spot Market If the operation is of daily nature , it is called spot market or current market. Handles only spot transactions or current transactions in foreign exchange. The exchange rate that prevails in the spot market for foreign exchange is called Spot Rate . Spot rate of exchange refers to the rate at which foreign currency is available on the spot . Not Quoted in Premium or Discount Here no specified reasons. Forward Market A market in which foreign exchange is bought and sold for future delivery is known as Forward Market. It deals with transactions (sale and purchase of foreign exchange) which are contracted today but implemented sometimes in future . Exchange rate that prevails in a forward contract for purchase or sale of foreign exchange is called Forward Rate . Forward rate is the rate at which a future contract for foreign currency is made . Quoted in Premium or Discount ( i ) To minimize risk of loss due to adverse change in exchange rate (i.e., hedging) and [ii ] to make a profit (i.e., speculation).