In: Finance
Compare and contrast Spotexchange and Forwardexchange rates. Discuss how a company may use a forward exchange rate contract to facilitate an international purchase transaction.
Spot rate is the rate at which it available in the current market and in this contract payments and delivery of the contract are made instantly.
Forward rate are futuristic rate at which the contract will be settled in future but contract is entered into forward rate today only.
Forward rate are used by company in order to enter into hedging transactions whereas, spot rate cannot be used to enter into hedging transactions
The use of forward rates are regarding a speculative data in the Forward Market, whereas, spot rate is just used for current transactions.
Forward rates can be used by the company to Hedge transactions as when the company will be entering into the foreign transaction, the company can use the forward contract in order to hedge its exposure into the foreign currencies as it can hedge through forward contracts with other suppliers and it can enter into contracts with forward rates the company in order to enter into various kinds of derivatives contract like future contracts along with option contracts and forward contracts so it will eliminate the risk arising out of entering into a futuristic transaction with international and national client