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b. Compare and contrast Spot exchange and Forward exchange rates. Discuss how a company may use...

b. Compare and contrast Spot exchange and Forward exchange rates. Discuss how a company may use a forward exchange rate contract to facilitate an international purchase transaction.

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Answer #1

Spot exchange rate is the exchange rate quoted for a foreign currency for exchanging the currencies today. It is the price of one currency in terms of another, if they are exchanged today.

On the other hand, forward exchange rate is the exchange rate quoted for a foreign currency for exchanging the currencies in the future. It is the price of one currency in terms of another, if they are exchanged at a specified time in the future.

A company which has to purchase internationally, has to pay the seller in their currency. The company will do this by selling its home (domestic) currency, and buying the foreign currency. If the payment is to be done in 3 months, the company can enter into a forward currency contract to lock-in the exchange rate. Thus, it can hedge its foreign currency risk.

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