Question

1. Please explain the difference between spot exchange rate and forward exchange rate

Answer 1

Ans ) Spot exchange rate : A spot exchange rate is the current price level in the market to directly exchange one currency for another, for delivery on the earliest possible value date. Cash delivery for spot currency transactions is usually the standard settlement date of two business days after the transaction date (T+2).

Forward exchange rate : The forward exchange rate (also referred to as forward rate or forward price) is the exchange rate at which a bank agrees to exchange one currency for another at a future date when it enters into a forward contract with an investor.

Difference between the spot rate or forward exchange rate :

• A spot rate is a contracted price for a transaction that will be completed immediately.
• A forward rate is a contracted price for a transaction that will be completed at an agreed upon date in the future.
• The spot rate typically is used as the starting point for negotiating the forward rate.

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