abhishreshthaa
Abhijeet S
Value Date: A settlement of any transaction takes place by transfers of deposits between the two parties. The day on which these transactions are effected is called the settlement date or the value date.
Settlement location: To effect the transfers, the banks in the countries of the two currencies involved must be open for business. The relevant countries are called settlement locations.
Dealing locations: The location of the two banks involved in the trade is dealing locations, which need not be the same as the settlement locations.
Classification of transaction based on value date
Where T represents the current day when trading takes place and n represents number of days.
• Cash – Cash rate or Ready rate is the rate when the exchange of currencies takes place on the date of the deal itself. There is no delay in payment at all, therefore represented by T + 0. When the delivery is made on the day of the contract is booked, it is called a Telegraphic Transfer or cash or value – day deal.
• Tom – It stands for tomorrow rate, which indicates that the exchange of currencies takes place on the next working day after the date of the deal, and therefore represented by T+ 1.
• Spot – When the exchange of currencies takes place on the second day after the date of the deal (T+2), it is called as spot rate. The spot rate is the rate quoted for current foreign – currency transactions. It applies to interbank transactions that require delivery on the purchased currency within two business days in exchange for immediate cash payment for that currency.
For e. g. a London bank sells yen against dollar to a Paris bank on Monday, 1st march, the London bank will turn over yen deposit in Japan to the Paris bank on Wednesday and the Paris bank will turn over $ deposit in US to the London bank on same day i. e. 3rd march, Wednesday. If the 3rd march is holiday in any bank in dealing location or settlement location deposit will takes place on next business day.
• Forward –The forward rate is a contractual rate between a foreign – exchange trader and the trader’s client for delivery of foreign currency sometime in the future. Here rate of transaction is fixed on transaction date for transactions in future. Standard forward contract maturities are 1,2,3,6, 9, and 12 months.
e. g. 1 month forward purchase of pounds against dollars on 1st Jan. Value date is arrived as follows:
Value date for spot transaction: 3rd Jan.
Value date for forward transaction:
3rd Jan + 1 calendar month = 3rd Feb
If the 3rd Feb. is holiday in any bank in dealing location or settlement location deposit will takes place on next business date. But this must not take you for next month, for e. g. if value date is Feb 28 is value date and it is ineligible your cannot shift it to 1st March it must be rolled back to Feb 27.
• Swap: A swap transactions in the foreign exchange market is combination of spot and forward transaction. Thus a bank will buy deutchemarks spot against US dollar and simultaneously enter into forward transaction with the same counterparty to sell deutchemarks against US dollar.
Settlement location: To effect the transfers, the banks in the countries of the two currencies involved must be open for business. The relevant countries are called settlement locations.
Dealing locations: The location of the two banks involved in the trade is dealing locations, which need not be the same as the settlement locations.
Classification of transaction based on value date
Where T represents the current day when trading takes place and n represents number of days.
• Cash – Cash rate or Ready rate is the rate when the exchange of currencies takes place on the date of the deal itself. There is no delay in payment at all, therefore represented by T + 0. When the delivery is made on the day of the contract is booked, it is called a Telegraphic Transfer or cash or value – day deal.
• Tom – It stands for tomorrow rate, which indicates that the exchange of currencies takes place on the next working day after the date of the deal, and therefore represented by T+ 1.
• Spot – When the exchange of currencies takes place on the second day after the date of the deal (T+2), it is called as spot rate. The spot rate is the rate quoted for current foreign – currency transactions. It applies to interbank transactions that require delivery on the purchased currency within two business days in exchange for immediate cash payment for that currency.
For e. g. a London bank sells yen against dollar to a Paris bank on Monday, 1st march, the London bank will turn over yen deposit in Japan to the Paris bank on Wednesday and the Paris bank will turn over $ deposit in US to the London bank on same day i. e. 3rd march, Wednesday. If the 3rd march is holiday in any bank in dealing location or settlement location deposit will takes place on next business day.
• Forward –The forward rate is a contractual rate between a foreign – exchange trader and the trader’s client for delivery of foreign currency sometime in the future. Here rate of transaction is fixed on transaction date for transactions in future. Standard forward contract maturities are 1,2,3,6, 9, and 12 months.
e. g. 1 month forward purchase of pounds against dollars on 1st Jan. Value date is arrived as follows:
Value date for spot transaction: 3rd Jan.
Value date for forward transaction:
3rd Jan + 1 calendar month = 3rd Feb
If the 3rd Feb. is holiday in any bank in dealing location or settlement location deposit will takes place on next business date. But this must not take you for next month, for e. g. if value date is Feb 28 is value date and it is ineligible your cannot shift it to 1st March it must be rolled back to Feb 27.
• Swap: A swap transactions in the foreign exchange market is combination of spot and forward transaction. Thus a bank will buy deutchemarks spot against US dollar and simultaneously enter into forward transaction with the same counterparty to sell deutchemarks against US dollar.