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Unit 3: Foreign Exchange Market and Exchange Rates

A short dated contract would be contract where the value date for the transaction is before the Notes
Spot value date. Normally a Spot transaction is settled within two business days after the day of
the transaction. If the transaction is for a shorter maturity and the contract is settled on the day
or the next day, it would be termed a short dated contract. Normally, these transactions are used
for rolling over the maturity positions in foreign exchange contracts.

3.3.2 Cross Rates of Exchange

An exchange rate between two currencies that is derived from the exchange rates of those
currencies with a third Currency is known as a cross rate of exchange. A cross rate can be
obtained by multiplying two exchange rates by each other so as to eliminate a third Currency
that is common to both rates. The most common use of cross rate calculations is to determine the
exchange rate between two currencies that are quoted against the US dollar but not against each
other.

Table 3.2: Cross Currency Rates

Source: http://www.onlineforextradingblog.com/
3.3.3 Spot Market and the Forward Market

The Foreign Exchange Market includes both the Spot and forward exchange market. The Spot
rate is the rate paid for delivery within two business days after the day the transaction takes
place. If the rate is quoted for delivery of foreign Currency at some future date, it is called the
forward rate.

Spot Market

The Spot Market is a market for immediate exchange of currencies. It is the market where
transactions of buying and selling are done for immediate delivery. In real practice, cash settlement
is made after two working (business) days, excluding holidays. In some cases, it takes less than
two days also. For example, the trades between US dollar and Canadian dollar or Mexican peso
are settled one business day after the deal, rather than two business day since Canada is in the
same time zone as the United States. The price of foreign exchange in the Spot Market is referred
to as the Spot rate.

A Spot transaction can be defined as an agreement to buy or sell a specified amount of a foreign
Currency within two business days of the transaction.

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