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Foreign Exchange Market - Spot Rates and Forward Rates

帮考网校2020-08-06 10:25:09

The foreign exchange market is a decentralized market where currencies are exchanged for other currencies. The exchange rates in this market are determined by the supply and demand of the currencies being traded. There are two types of exchange rates in the foreign exchange market: spot rates and forward rates.

Spot Rates:
A spot rate is the exchange rate at which a currency pair can be bought or sold for immediate delivery. It is the rate at which currencies are exchanged on the spot or immediately. The spot rate is determined by the supply and demand of the currency pair at the time of the transaction. The spot rate is also known as the "current exchange rate" or "spot exchange rate."

Forward Rates:
A forward rate is the exchange rate at which a currency pair can be bought or sold for delivery at a future date. It is the rate at which currencies are exchanged at a future date, usually 30, 60, or 90 days from the time of the transaction. The forward rate is determined by the interest rate differential between the two currencies in the currency pair. The forward rate is also known as the "forward exchange rate."

The difference between the spot rate and the forward rate is known as the "forward premium" or "forward discount." If the forward rate is higher than the spot rate, it is said to be at a forward premium. If the forward rate is lower than the spot rate, it is said to be at a forward discount. The forward premium or discount reflects the market's expectation of the future movement of the exchange rate.