In: Finance
Transactions in the Interbank Market ( in 500 words )
Interbank Market
It refers to a network for trading currencies where the participants are global banks. This network acts as an exchange where the banks can place orders for both buying and selling foreign currencies and use different instruments such as derivatives to trade.
The market functions on the basis of an 'Interbank rate'. It is a decentralized and unregulated form of market.
Transactions in the Interbank Market
The following are the transactions in the interbank market :
1. Spot transactions: In this type of transaction, the agreement for buying and selling of currencies is decided and also executed on the same day or date. It is called ready or cash transactions.
In case the transaction is where the exchange takes place after two days its called a spot transaction.
The following are a type of spot transactions:
2. Forward transactions: A type of transaction where the exchange occurs at a future date which is specified for 2 or 3 months in advance is known as the forward transaction. A forward contract maturing after a month means the exchange of currencies takes place a month after the date of the contract.
3. Forward margin or SWAP transactions: The forward rate will not be the same as spot rate in most scenarios. In case the rates are same it is said to be at par. The difference in the spot and forward rate is called the 'forward margin'. This margin may be at a discount or a premium. A premium is added to the spot rate is called the forward rate.