Definition of Foreign Exchange Instruments

Spot Transaction

A spot foreign exchange transaction is the exchange of one currency for another, at the spot (or today’s) exchange rate. Although the exchange rate is agreed at the time of the transaction, market convention dictates that the exchange of funds (settlement) will occur two business days later (the spot date).

Forward Transaction A forward transaction is identical to a spot transaction, except that the settlement date (and the exchange of currencies) is more than two business days ahead. The forward transaction allows each party to lock in a known forward exchange rate today, with the outright exchange of currency amounts occurring at a future date.

Foreign Exchange Swap Transaction A foreign exchange swap (FX swap) is an agreement to exchange two currencies at the Current spot date and to reverse the transaction at a specified future date. In fact, an FX swap is equivalent to a spot transaction and an offsetting forward transaction rolled into one. Entering into an FX swap is equivalent to borrowing in one currency and lending in another, allowing management of cross-currency cash flows. The FX swap market can be a more efficient way of borrowing and lending currency amounts than using the relevant currency money markets directly. FX swaps carry no currency exposure because the exchange rate on the spot date and at the future settlement date is fixed at the time of the transaction. Globally, FX swaps continue to be the most heavily traded FX instrument. A significant reason for this is due to market players’ preference to repeatedly transact short term FX swaps rather than transacting one longer maturity swap.

Currency Options

A currency option gives the holder the right, but not the obligation, to buy or sell one currency against another at a specified exchange rate, over a specified period. Most

Currency options are ‘over-the-counter’, meaning they are written by financial institutions to meet the exact needs of the option buyer.

FXTrends: Currency Exchange Trends

This table displays the change (trend) in currency exchange rates for the top most traded currencies.

How to Read this table

Each line shows the percentage change in the value of the currency exchange rate relative to the value of the day before, 7 days before, 30 days before, and 365 days before, respectively. Currency Rate shows the exchange rate for selling the currency pair. For example EUR/USD=0.972 means 1 EUR = 0.972 USD.Arrows indicate the direction of the change.

Importance of Foreign Exchange

Foreign Exchange is the system or Process of converting one national currency into another, and of transferring money from one country to another.

Foreign Exchange is used to refer to foreign currencies. Foe example The Foreign Exchange Regulation Act, 1973 (FERA) define:-

Foreign Exchange has foreign currencies and includes all deposits, credits and Balance of Payments in any foreign currency and any drafts, traveler’s cheques, letter of credits and Bills of exchange, expressed or drawn in Indian currency, but payable in any foreign currency.

Generally, in our country we make payments for our purchases in coins or notes. When the amount is big we pay through a cheque on some local bank. If we want to remit money to distant places we may issue a cheque or send a bank draft. But, if we have to make payments to a foreigner say, in New York, we shall have to call our banker to change our rupees into dollars, and remit them to New York. This change of rupees into dollars (or any other currency) and vice versa is called Foreign Exchange.