The document discusses the spot and forward foreign exchange markets. The spot market involves transactions that are settled within two business days at the spot exchange rate. The forward market involves contracts agreed upon today but settled at a predetermined future date at a fixed exchange rate. There are various types of participants and transactions in each market, including spot deals between currencies, outright forwards that lock in rates for future delivery, and swaps that involve simultaneous spot and forward currency trades.

1. SPOT MARKET
&
FORWARD MARKET

2. ORGANIZATION OF THE FOREIGN
EXCHANGE MARKET
Two Types of Currency Markets
1. Spot Market
2. Forward Market

3. SPOT MARKET
In finance, a spot contract, spot transaction, or
simply spot, is a contract of buying or
selling commodity, security or currency for settle
ment (payment and delivery) on the spot date,
which is normally two business days after
the trade date. The settlement price (or rate) is
called spot price (or spot rate).

4. PARTICIPANTS BY MARKET
a. commercial banks
b. brokers
c. customers of commercial and central
banks

5. TYPES OF SPOT RATES
Bid Rate- one currency can be purchased in
exchange for another
Offer Rate- one currency can be sold in exchange
for another

6. TYPES OF SPOT DEALS
Rand/USD deals
USD/Foreign currency deals
Rand/Foreign currency deals
Foreign currency/Foreign currency deals

7. MECHANICS OF SPOT TRANSACTIONS
SPOT TRANSACTIONS: An Example
Step 1:
Currency transaction: verbal agreement, U.S.
importer specifies:
a. Account to debit (his acct)
b. Account to credit (exporter)

8. Step 2:
Bank sends importer contract note including:
- amount of foreign currency
- agreed exchange rate
- confirmation of Step 1.

9. Step 3: Settlement
Correspondent bank in Hong Kong
transfers HK$ from importers account to
exporter’s.

10. THE FORWARD MARKET
Definition:
“an agreement between a bank and a
customer to deliver a specified amount of
currency against another currency at a specified
future date and at a fixed exchange rate”.
often 30, 90, 180 days.

11. PARTICIPANTS
a. Arbitrageurs
b. Traders
c. Hedgers
d. Speculators

12. TYPES OF FORWARD RATE
Outright Forward
Swap Forward

13. OUTRIGHT FORWARD
A forward currency contract with a locked-in
exchange rate and delivery date.
An outright forward contract allows an investor to
buy or sell a currency on a specific date or within
a range of dates.
Foreign exchange forward contracts function is a
very similar fashion to standard forward contracts.

14. For example: A French company that buys materials from
a Chinese supplier may be required to provide payment for
half of the total value of the payment now and the other
half in six months. The first payment can be covered with a
spot trade, but in order to reduce currency risk exposure,
the French company locks in the exchange rate with an
outright forward.

15. SWAP FORWARD
Is a simultaneous purchase and sale of identical amounts of one currency for
another with two different value dates (normally spot to forward).
Foreign Exchange Swap allows sums of a certain currency to be used to fund
charges designated in another currency without acquiring foreign exchange
risk. It permits companies that have funds in different currencies to manage
them efficiently.
swap contract: swap contract is an agreement between two party to
exchange a cash flow in one currency against a cash flow in another
currency according to predetermine terms & conditions.

16. The difference between a forward contract and a swap is that
a swap involves a series of payments in the future, whereas
a forward has a single future payment.
Two most Basic Swaps are:
Interest Rate Swaps
Currency Swaps

17. SPOT VS FORWARD
Spot Market
If the operation is of daily nature, it is
called spot market or current market.
Handles only spot transactions or
current transactions in foreign
exchange.
The exchange rate that prevails in the
spot market for foreign exchange is
called Spot Rate.
Spot rate of exchange refers to the
rate at which foreign currency is
available on the spot.
Not Quoted in Premium or Discount
Here no specified reasons.
Forward Market
•A market in which foreign exchange is
bought and sold for future delivery is
known as Forward Market.
•It deals with transactions (sale and
purchase of foreign exchange) which are
contracted today but implemented
sometimes in future.
•Exchange rate that prevails in a forward
contract for purchase or sale of foreign
exchange is called Forward Rate.
•Forward rate is the rate at which a future
contract for foreign currency is made.
•Quoted in Premium or Discount
•(i) To minimize risk of loss due to
adverse change in exchange rate (i.e.,
hedging) and [ii] to make a profit (i.e.,
speculation).