Dealings on the Foreign Exchange Market Spot and Forward Exchange

The term Spot exchange refers to the class of foreign exchange transaction which requires the immediate delivery or exchange currency on the spot. In practice, the settlement takes place with in two days in most markets.

The forward transaction is an agreement between two parties, requiring the delivery at the some specified future dates of a specified amount of foreign currency by one of the parties, against payment in domestic currency by the other party, at the price agreed upon in the contract. The rate of exchange applicable to the forward contract is called the ‘Forward Exchange Rate” and the market for forward transaction are known as “Forward Market”.

Forward Exchange Rate: - The rate quoted in terms of price of one country to another. The forward exchange rate may be at Par, Discount, and Premium.

At Par: - If the forward exchange rate quoted is exactly equivalent to the spot rate at the time of making the contract, the forward exchange rate is said to be at Par.

At Premium: - The forward rate of currency, say the dollar is said to be at premium with respect to the spot rate when one dollar buys more units of another currency, say rupee in the forward than in the spot market.

At Discount: - The forward rate for a currency, say the dollar, is said to be at discount with respect to the spot rate when one dollar buys fewer rupees in the forward.

Futures

While a future contract is similar to a forward contract, there are several difficulties between them. While a forward contract is tailor –made for the client by his international bank, a future contract has standardized features. The contract size and maturity dates are standardized futures can be traded only on an organized exchange and they are traded competitively. Margins are not required in respect of a forward contract but margins are required of all participants in the future market.

Options

An option is a contract or financial instrument that gives holders the right, but not the obligation, to sell or buy a given quantity of an asset a specified price at a specified future date.

An option to buy the underlying assets is known as a call option, and an option to sell the underlying assets is known as a put option.

Buying or selling the underlying assets via. The option is known as exercising the option. The stated price paid (or received) is known as the exercise or strike price. The buyer of an option is known as the long and the seller of an option known as the writer of the option, or the short. The price for the option is known as premium.

With reference to their exercise characteristics, there are two types of options, American and European. An European option can be exercised only at the maturity or expiration date of the contract, whereas an American option can be exercised at any time during the contract.

Balance of Payment

The Balance of Payment summarizes economic transactions between the residents of a given country and the residents of other country during a given period of time.

Structure of BOP (Components)

A Balance of Payments statement is tabulated to summarize a nation’s total economic transaction undertaken on the international trade account. It comprises three distinctive types of accounts.

Current Account: Import and Export of goods and services are recorded in trading account and a service includes interest, dividend, travels, shipping, Insurance, Banking etc.

Capital Account: Financial Assets and Liabilities, Sale / purchase of fixed assets etc.

Official reserves: The reserves holding by the govt. or official agency mean to settle the payments. Interventions of the official reserves for the payment of foreign exchange market.

Disequilibrium the Balance of Payment

The balance of payments as the difference between Receipts and Payments to foreign by the residents of the country. A Countries Balance of Payments is said to be in disequilibrium when there is either “Surplus” or “Deficit” in the Balance of Payment.

Causes of Disequilibrium of Balance of Payment

Trade Cycle

Huge developmental and investment programmes.

Change in export demand

Population growth

Huge external borrowings

Inflation

Demonstration effects (social, cultural, political factors)

Reciprocal demand.