security law Types of Spot Rates notes
1. Ask price: - Is the rate at which the foreign exchange dealer asks it’s customer to pay in local currency exchange of the foreign currency. - Is the rate at which the foreign currency can be purchased from the dealer. 2. Bid rate: - Is the rate at which the dealer is ready to buy the foreign currency in exchange for the domestic currency. - Is the rate at which the dealer is ready to pay in domestic currency in exchange for the foreign currency and they are ready to pay for buying it. - Normally, the direct ask price is greater than the direct bid price and the difference between the two is known as the ask-bid spread. - The bid spread is usually stated as a percentage cost of transacting in the foreign exchange market and may be computed as follows: - % Spread = Ask price-Bid price Ask price Cross rates: -The exchange rate between two currencies calculated on the basis of the rate of these two currencies in terms of a third currency. -Forward rate is a price quotation to deliver the currency in future. - The exchange rate is determined at the time of concluding the contract, but payment and delivery are not required till maturity. - Forward rate may be higher than the spot rate if the market participants expect the currency to appreciate v-s-v the other currency, say US dollar. The currency, in such case is called trading at a forward premium. - If the forward rate is lower than the spot rate, the participants expect the currency to depreciate v-s-v the US dollar. The currency in such case is said to be ‘trading at forward discount’. - Forward premium/discount is generally calculated as percentage per annum. - = (Forward rate-Spot rate) 12/n. *100 Spot rate Where ‘n’ indicates the number of months till maturity of the forward contract
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