Question

Know why momentum seems to work when trying to forecast the future spot exchange rate using the forward exchange rate market. What is a banker's acceptance? How does it facilitate international trade by solving the "problem" of an exporter wanting to get paid before it exports goods and the importer wanting to receive the goods before paying for them?

Answer 1

Letter of Credit is a sort of guarantee given by the bank that the buyer will make the accurate payment on time to the seller. In respect of letter of credit bank will charge commission. However , in the given case, it wants to forecast spot rate using forward exchange rate market. forward exhange is calculated by taking interest factor on spot rate. Banker have two rate which is known as bid and ask. ask is such rate on which banker sale their foreign current and ask rate is buying rate of bankers. So in the given case, the importer needs to visit bank for purchase of foreign currency by entering forward exhcange rate at banker's ask rate.

There may be circumstances that banker will issue letter of credit which is to issued to exporter on behalf of importer. Bank will charges certain point of comminssion. Due to this method,importer will be able to make payment to exporter. and exporter will receive such amount at certain point of time.