In foreign exchange market, it takes some times to process the transactions and send the instruction to the correspondent bank/branch abroad. Therefore, it is customary to quote the rate to do the deal exchange the currencies not on the same date but generally afterwards.
Value date is the date on which the exchange of currencies actually takes place. This is irrespective of the date of deal.
Date of deal Value Date
Cash/Ready
9-1-2003 Friday 9-1-2003 Friday
Tom
9-1-2003 Friday 12-1-2003 Monday
Spot
9-1-2003 Friday 13-1-2003 Tuesday
Forward
9-1-2003 Friday 14-1-2003 Beyond Spot Date
Generally exchange rates are quoted on spot basis i.e. the settlement takes place on the second working day after the date of transaction. The exchange rate for settlement on a day beyond spot date is naturally different and is called ‘forward rate’
Forward rate has two components;
1) spot rate
2) forward points
Forward points, also called as forward differentials, reflect the interest differential between the pair of currencies provided capital flows are freely allowed.
This is not true in case of US $ / Rupee rate as there are exchange control regulations prohibiting free movement of capital from/into India. In case of US $ / Rupee it is pure demand and supply which determines forward differentials.
If forward price is higher than the spot price the currency is said to be at ‘premium’. And if forward price is lower than spot price the Currency is said to be at ‘discount’.
Forward rates are quoted by indicating spot rate and premium/discount. In direct rate.
Forward rate = spot rate + Premium / - Discount
In foreign exchange market forward transaction are necessary for following reasons:
One can hedge or cover an existing future financial, commercial or trade related exchange risk.
These types of deals, in combinations of spot deals, are used for money market operations through ‘ swap transactions’.
Taking a view of the market, these can be used for speculation.
Premium
When a currency is costlier in future (forward) as compared to spot, the currency is said to be at premium vis-à-vis another currency.
Discount
When a currency is cheaper in future (forward) as compared to spot, the currency is said to be at discount vis-à-vis another currency.
Value date is the date on which the exchange of currencies actually takes place. This is irrespective of the date of deal.
Date of deal Value Date
Cash/Ready
9-1-2003 Friday 9-1-2003 Friday
Tom
9-1-2003 Friday 12-1-2003 Monday
Spot
9-1-2003 Friday 13-1-2003 Tuesday
Forward
9-1-2003 Friday 14-1-2003 Beyond Spot Date
Generally exchange rates are quoted on spot basis i.e. the settlement takes place on the second working day after the date of transaction. The exchange rate for settlement on a day beyond spot date is naturally different and is called ‘forward rate’
Forward rate has two components;
1) spot rate
2) forward points
Forward points, also called as forward differentials, reflect the interest differential between the pair of currencies provided capital flows are freely allowed.
This is not true in case of US $ / Rupee rate as there are exchange control regulations prohibiting free movement of capital from/into India. In case of US $ / Rupee it is pure demand and supply which determines forward differentials.
If forward price is higher than the spot price the currency is said to be at ‘premium’. And if forward price is lower than spot price the Currency is said to be at ‘discount’.
Forward rates are quoted by indicating spot rate and premium/discount. In direct rate.
Forward rate = spot rate + Premium / - Discount
In foreign exchange market forward transaction are necessary for following reasons:
One can hedge or cover an existing future financial, commercial or trade related exchange risk.
These types of deals, in combinations of spot deals, are used for money market operations through ‘ swap transactions’.
Taking a view of the market, these can be used for speculation.
Premium
When a currency is costlier in future (forward) as compared to spot, the currency is said to be at premium vis-à-vis another currency.
Discount
When a currency is cheaper in future (forward) as compared to spot, the currency is said to be at discount vis-à-vis another currency.