A contract is an agreement to buy or sell an asset. Discuss the difference between a...

A contract is an agreement to buy or sell an asset. Discuss the difference between a spot and a forward contract on a currency in terms of their features. (10 points)d

Expert Solution

CURRENCY FORWARD CONTRACT

Is related to future. Agreement is made between 2 parties who agrees to exchange a specific or certain amount of currency for another currenc at a fixed rate of exchange on a prespecified future date mentioned in the agreement.
The person who is at loss position on fixed future date have to make payment to the person at gain position.
Future settlement
You can buy currency now and pay later
The rate in forward contract is Forward rate.
Forward rate is the rate at which a contract is made for future for foreign currency

CURRENCY SPOT CONTRACT

It helps to trade currency at spot date
Can be used for immediate international payments
Immediate settlement usually on spot date with current rate
Highly risky(changes may happen in exchange rate)
The rate in spot market for foreign exchange is spot rate.
Spot rate is the rate at which Foreign currency available on the spot.

jeff jeffy answered 1 year ago

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