Any talk regarding foreign exchange rates is incomplete without mentioning the workings of foreign exchange market. This is the market which involves currency rates of the two respective countries. Like any other market, foreign exchange market too is a market where buyers and sellers negotiate and agree on one price which is also called currency exchange rates. Here, the commodity being negotiated is foreign exchange itself that is currency itself and the price that is decided is known as foreign exchange rates. To be precise, the U.S. dollar is traded for the euro at a particular rate of exchange. And, since it is a global liberalized world, the currency rates are affected by various socio-political issues.
In order to protect the investment on foreign currency, there is a concept called forward market for foreign exchange. In this forward market, buyers and sellers arrive at some agreement to buy and sell currency at a specified foreign exchange rates. As per this agreement, the specified bulk of foreign exchange is decided to be bought or sold at a specified rate at some date in future. This then implies that there is a considerable time gap between the negotiations of the transaction and the actual settlement of the negotiations.
The forward market is different from the spot transactions in a sense that spot transactions are decided, negotiated and settled within two business days. The forward market is protective in a sense that when the negotiations are sealed, they are out of the “uncertainty zone” which typically defines the foreign exchange market. In a typical forward market contract, foreign exchange rates are calculated based on the prevailing interest rates and the spot exchange rate. Hence, forward exchange rate is the spot rate adjusted for the difference in interest rates between the currency rates of two different countries and the currency financial instruments over the period of time between when the transaction is negotiated and when it is settled.
In order to protect the investment on foreign currency, there is a concept called forward market for foreign exchange. In this forward market, buyers and sellers arrive at some agreement to buy and sell currency at a specified foreign exchange rates. As per this agreement, the specified bulk of foreign exchange is decided to be bought or sold at a specified rate at some date in future. This then implies that there is a considerable time gap between the negotiations of the transaction and the actual settlement of the negotiations.
The forward market is different from the spot transactions in a sense that spot transactions are decided, negotiated and settled within two business days. The forward market is protective in a sense that when the negotiations are sealed, they are out of the “uncertainty zone” which typically defines the foreign exchange market. In a typical forward market contract, foreign exchange rates are calculated based on the prevailing interest rates and the spot exchange rate. Hence, forward exchange rate is the spot rate adjusted for the difference in interest rates between the currency rates of two different countries and the currency financial instruments over the period of time between when the transaction is negotiated and when it is settled.
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