Question

Define and explain what is meant by:-

(a) Sport transaction                           (b) Forward transaction

(c) Appreciation                                  (d) Depreciation.

Answer 1

Hoping the first part is spot transaction not sport transaction.

Foreign exchange market is the network of dealers and other participants engaged in exchange of currencies. The market may be spot where transactions for immediate delivery are undertaken or may be forward where the delivery takes place in future.

a) Spot Transaction- A spot transaction is a transactin where buying or selling of foreign currencies, financial instruments or commodity happens for immediate delivery on a pre specified spot date. For example, a British importer may need U.S $ to pay for the shippment that has just arrived. He will have to purchase the $ in the market to make payment for the import. The rate at which he will buy the $ in the market is known as the spot exchange rate. He will make the payment in terms of £ and gets in turn U.S $ which will be paid to the foreign exporter. Most spot market transactions have a T+2 settlement date. Spot market transactions can take place on an exchange or over-the-counter.

b) Forward Transaction - When the buyers and the sellers of currencies agree to transact a specific amount of currenct at a specific rate at a specified future date, is refered as a forward transaction. The forward exchange rate is set and agreed by the parties and remains fixed for the contarct period regardless of the fluctuations in the spot exchange rates in the future. the exchange rate is agreed today, though the actual transactions of buying and selling will take place on the specified date only. For example an American firm buys electronics from a British firm with payment of £10,00,000 in 90 days. The American importer, thus, is short of £ i.e, he owes future £ for payment. Forward contracts do not trade on a centralized exchange and are considered over-the-counter (OTC) instruments.

c) Appreciation - Appreciation refers to a increase in the value of any asset, be it stock, bond, currency or real estate. Currency appreciation is an upward movement of the value of currency comparing to another currency. There are numerous reasons that leads currency appreciation, that may include government policy, interest rates, trade balances and business cycles, to name a few. Currency appreciation happens in a floating exchange rate system, so a currency appreciates when the value of one goes up compared to another.

d) Depreciation - Depreciation refers to a decrease in the value of any asset, be it stock, bond, currency or real estate. Currency depreciation is a downward movement of the value of currency comparing to another currency.