Define each of the following types of foreign transactions: 1. Spot 2. Outright Forward 3. Forward-Forward...

Define each of the following types of foreign transactions: 1. Spot 2. Outright Forward 3. Forward-Forward Swaps

Expert Solution

1. Spot Transaction - The exchange of currencies at the prevailing market rates can be defined as Spot Tranasction. Spot transactions are usually settled in two business days from the date of entering the transaction. For example if contract for certain foregin exchange is made on Tuesday then completion of the tranasction will take place on Thursday.

2. Outright Forward Transaction - Outright Forward Transaction or Currency Forward can be defined as transaction entered between parties to buy or sell currency at a rate which is determined today but the transaction will take place in future period. Take the example of Forward rate which is fixed today for delivery to be taken at a future period. One advantage of using Outright Forward Transaction is that as the exchange rate is predetermined the parties enterning into such a transaction will be safeguarded from huge variations of foregin exchange rate if any, in the future.

3. Forward - Forward Swaps Transaction - This swap is a combination of two forward contracts.A forward-forward swap transaction is between two forward dates. This swap is set off in a future date which is more than two business days.

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