Business
Spot Exchange Rate
The spot exchange rate refers to the current exchange rate at which a foreign currency can be bought or sold for immediate delivery. It is the prevailing rate at a specific point in time and is used for immediate transactions, such as buying goods or services in a foreign currency. This rate is influenced by supply and demand dynamics in the foreign exchange market.
Written by Perlego with AI-assistance
Related key terms
1 of 5
12 Key excerpts on "Spot Exchange Rate"
eBook - PDFInternational Economics and Business
Nations and Firms in the Global Economy
- Sjoerd Beugelsdijk, Steven Brakman, Harry Garretsen, Charles van Marrewijk(Authors)
- 2013(Publication Date)
- Cambridge University Press(Publisher)
Almost 50 per cent of euro area exports to non-euro countries use the euro as invoice currency. The second most important currency is the US dollar; other currencies follow at a large distance. Hedging exchange rate risks with all sorts of derivatives tends to be successful in reducing exposure to exchange risks, more in the short run than in the longer run. Exchange rates 229 yen in terms of British pounds. Since the exchange rate is a price, a rise in the exchange rate indicates that the item being traded has become more expensive, just like any other price rise indicates. Therefore, if the exchange rate of a Singapore dollar in terms of European euros rises, this indicates that the Singapore dollar has become more expensive. Various specialized symbols have been introduced to identify speci fi c currencies, such as $ to denote (US) dollars, € to denote European euros, £ to denote (British) pounds, and ¥ to denote (Japanese) yen. Table 8.1 lists some of these international currency symbols. The table also lists the three-letter international standard (ISO) code to identify the currencies. Spot Exchange Rates As discussed below, there are various types of exchange rates, but we fi rst focus attention on the Spot Exchange Rate, the price of buying or selling a particular currency at this moment. Table 8.2 lists some Spot Exchange Rates as recorded on 24 July 2012, at 8.29 a.m. ET (Eastern Time). The fact that we have to be so precise by listing not only the day on which the Spot Exchange Rates were recorded, but also the exact time and the time zone signals an important general property of exchange rates: they are variable. In fact, exchange rates are extremely variable : only a few minutes later all quoted prices for the Spot Exchange Rates deviated from the data reported in Table 8.2 .
eBook - PDF- Imad A Moosa, Razzaque H Bhatti(Authors)
- 2009(Publication Date)
- World Scientific(Publisher)
Why Do We Study Exchange Rates? 3 0 500 1000 1500 2000 2500 3000 3500 1992 1995 1998 2001 2004 2007 Total Spot Figure 1.1. Daily turnover in the foreign exchange market ($ million). capital account transactions, as well as transactions with local counterparties involving foreign currencies (for example, foreign currency deposits held by locals with domestic banks). 1.2. The Importance of Exchange Rates It is not an exaggeration to say that the exchange rate is the single most important macroeconomic variable in an open economy. This is so much the case in the present environment of financial deregulation and globalization of financial markets. In this section, we elaborate on some of the points that were raised briefly in the previous section. 1.2.1. The Exchange Rate and Business Operations The exchange rate is very important for businesses, particularly under the present international environment. Business firms indulge in international operations to reap the benefits arising from the globalization of trade and finance. One obvious benefit of international trade is the extension of the market for the firm’s products beyond the national frontiers. The advantage of the globalization of finance is to enhance the ability of business firms to diversify their financing and investment portfolios. However, there is 4 The Theory and Empirics of Exchange Rates no “free lunch”: these opportunities bring with them exposure to foreign exchange risk, which results from (unanticipated) fluctuations in exchange rates. Foreign exchange risk is typically classified into transaction risk, eco-nomic risk, and translation risk. Transaction risk results from the effect of fluctuations in exchange rates on the contractual cash flows associated with existing trade contracts, as well as foreign assets and liabilities. Eco-nomic risk, on the other hand, results from the effect of changes in the (real) exchange rate on cash flows that are not contractual as well as market share.
eBook - PDF- Rhona C. Free(Author)
- 2010(Publication Date)
- SAGE Publications, Inc(Publisher)
It can be argued that not only the value of a currency but also its predictability can affect interna-tional businesses. If one company is going to have opera-tions in a country whose currency has an uncertain future value, then there may be uncertainty about this company's future revenues, operational costs, and therefore profits. As it is well known, risk-averse companies prefer to decrease the risk and uncertainty of future revenues and costs. In addition to its importance for trade and investment across countries, the exchange rate is important as the essential component of the foreign exchange market or FX market. The FX market, the global market for cur-rencies, is the largest and most liquid financial market in the world. According to a survey conducted by the Bank for International Settlements (2002), the average daily trade in the FX market surpasses U.S.$1.2 trillion. All of these reasons and many more make study of exchange rates an essential component of the curriculum for any student of economics or aspiring economist. That is why this handbook has decided to dedicate an entire chapter to the topic of exchange rates. In this chapter, you will learn about the functioning of the foreign exchange rate system. We start by giving a historical account of the different exchange rate systems around the world. In the past, particularly in the period from World War II to the end of the Bretton Woods era, it was common for many countries around the world to have fixed exchange rates. That is, the value of the currency was pegged to the value of some other currency. This arrangement was adopted by different countries with the hope that it would avoid uncertainty about the value of their currency and the economic conse-quences of such uncertainty. Nowadays, most major cur-rencies are flexible, and their values are determined by demand and supply in the foreign exchange market.
eBook - PDF- Dominick Salvatore(Author)
- 2012(Publication Date)
- Wiley(Publisher)
Source: The Conference Board, Business Cycle Indicators (December 2010), p. 23. Chapter Eleven The Foreign Exchange Market and Exchange Rates 297 Similarly, a U.S. exporter who expects to receive a payment of ¤100,000 in three months will receive only $90,000 (instead of the $100,000 that he or she anticipates at today’s spot rate of SR = $1/¤1) if the spot rate in three months is SR = $0.90/¤1. Once again, the spot rate could be higher in three months than it is today so that the exporter would receive more than anticipated. However, the exporter, like the importer, will usually want to cover the exchange risk that he or she faces. Another example is provided by an investor who buys euros at today’s spot rate in order to invest in three-month EMU treasury bills paying a higher rate than U.S. treasury bills. Foreign exchange risk The risk resulting from changes in exchange rates over time and faced by anyone who expects to make or to receive a payment in a foreign currency at a future date; also called an open position. However, in three months, when the investor wants to convert euros back into dollars, the spot rate may have fallen sufficiently to wipe out most of the extra interest earned on the EMU bills, or even produce a loss. These three examples clearly show that whenever a future payment must be made or received in a foreign currency, a foreign exchange risk, or a so- called open position, is involved because Spot Exchange Rates vary over time. In general, businesspeople are risk averse and will want to avoid or insure themselves against their foreign exchange risk. (Note that arbitrage does not Concept Check How do foreign exchange risks arise? involve any exchange risk since the currency is bought at the cheaper price in one monetary center and immediately resold at the higher price in another monetary center.) 11.9 HEDGING Hedging refers to the avoidance of a foreign exchange risk, or the covering of an open position.
No longer available |Learn more- (Author)
- 2019(Publication Date)
- Wiley(Publisher)
Foreign Exchange Market Concepts We begin with a brief review of some of the basic conventions of the FX market that were covered in the CFA Level I curriculum. In this section, we cover (1) the basics of exchange rate notation and pricing, (2) arbitrage pricing constraints on spot rate foreign exchange quotes, and (3) forward rates and covered interest rate parity. An exchange rate is the price of the base currency expressed in terms of the price currency. For example, a USD/EUR rate of 1.3650 means the euro, the base currency, costs 1.3650 US dollars (an appendix defines the three-letter currency codes used in this reading). The exact notation used to represent exchange rates can vary widely between sources, and occasionally the same exchange rate notation will be used by different sources to mean completely different things. The reader should be aware that the notation used here may not be the same as that encountered elsewhere. To avoid confusion, this reading will identify exchange rates using the convention of “P/B,” referring to the price of the base currency “B” expressed in terms of the price currency “P.” 1 The Spot Exchange Rate is usually used for settlement on the second business day after the trade date, referred to as T + 2 settlement. 2 In foreign exchange markets—as in other financial markets—market participants are presented with a two-sided price in the form of a bid price and an offer price (also called an ask price) quoted by potential counterparties. The bid price is the price, defined in terms of the price currency, at which the counterparty is willing to buy one unit of the base currency
eBook - ePubCountry Analysis
Understanding Economic and Political Performance
- David M. Currie(Author)
- 2016(Publication Date)
- Routledge(Publisher)
CHAPTER 8 CurrenciesExchange rates frequently are a difficult topic for US executives. The US economy is so large that most Americans don’t have to worry directly about the value of the dollar on the international currency market. We produce and consume many of our goods domestically, so foreign exchange is not a concern. When we purchase goods produced in other countries, someone else has already exchanged currency, so all we see is the US dollar cost of the products. When we sell goods to other countries, someone else worries about the value of the goods in foreign markets; we’re content to receive our wages or salaries in US dollars.It’s not until we pack our bags for a trip to Europe, Asia, or Latin America that we suddenly face the question of how much our dollar is worth on a foreign market. And then we encounter professionals who deal with currencies on a daily basis. They either meet us at the airport with hands full of currency, shouting that they will buy our dollars, or they’re waiting for us at exchange booths or banks. Either place, we’re in unfamiliar territory.Learning Objectives
After studying this chapter, you should be able to: 1. interpret exchange rates quoted in two ways; 2. explain and apply the concepts of currency appreciation and depreciation; 3. calculate the value in one currency of an asset or liability priced in a different currency; 4. discriminate between the spot rate and the forward rate; 5. explain the factors that influence the value of a currency; 6. explain the difference between fixed and floating exchange rate regimes; 7. explain the risk in a currency transaction caused by appreciation or depreciation of either currency.What is an Exchange Rate?
An exchange rate
eBook - PDF- Dominick Salvatore(Author)
- 2014(Publication Date)
- Wiley(Publisher)
4. From the exchange rate between each of a pair of currencies with respect to the dollar, the cross rate between the two currencies themselves can be determined. The effective exchange rate is a weighted average of Chapter Eleven The Foreign Exchange Market and Exchange Rates 293 the exchange rates between the domestic currency and the nation’s most important trade partners. Arbitrage refers to the purchase of a currency where it is cheaper for immediate resale where it is more expensive. This equalizes exchange rates and ensures consistent cross rates in all monetary centers. 5. If the quantity demanded of euros on U.S. private transactions exceeds the quantity supplied, the dollar would depreciate until the excess demand for euros is eliminated. To keep the exchange rate fixed, the U.S. monetary authorities would have to satisfy the excess demand for euros out of their official euro reserves (a U.S. balance of payments deficit). A potential U.S. balance of payments deficit could also be covered partly by a dollar depreciation and partly by the loss of U.S. official reserves. 6. A spot transaction involves the exchange of currencies for delivery within two business days. A forward transaction is an agreement to purchase a specified amount of a foreign currency for delivery at a future date (usually one, three, or six months hence) at a rate agreed upon today (the forward rate). When the forward rate is lower than the spot rate, the foreign currency is said to be at a forward discount of a certain percentage per year. In the opposite case, the foreign currency is said to be at a forward premium. 7. A foreign exchange futures is a forward contract for standardized currency amounts, available for specific currencies and selected calendar dates and traded on an organized exchange. A foreign exchange option is a contract specifying the right to buy or sell a standard amount of a traded currency at or before a stated date.
eBook - ePub- W. Charles Sawyer, Richard L. Sprinkle(Authors)
- 2020(Publication Date)
- Routledge(Publisher)
T he international value of a country’s currency has become an inescapable part of the daily flow of economic information. Most of us are aware that a country’s exchange rate is important, but many of us do not have a clear idea of why the exchange rate matters or what causes it to change. As the chapter’s opening quote indicates, the familiar tools of supply and demand analysis can be used to determine a country’s exchange rate. In this chapter, you will learn why the supply and demand model works in analyzing exchange rates—in the same manner, in fact, that it works in analyzing the price of gasoline or pizza, for one dollar or one yen or one gallon of gasoline is indistinguishable from another. By the end of this chapter you should have a good grasp of why exchange rates are important and what factors cause them to change over the long run. Finally, it is obvious to even a casual observer that exchange rates change frequently. These changes, or volatility, are a source of aggravation for individuals, businesses, and governments. The chapter explains what economists know about the effects of exchange rate volatility on international trade and how changes in exchange rates affect the prices of the goods and services we purchase. The final part of the chapter deals with the underlying value of a currency. While the exchange rate we observe in the market often differs from that value, it is very useful to know what that value is.EXCHANGE RATESSuppose that a U.S. importer is purchasing British Jaguars. To purchase the Jaguars, the importer needs to obtain British pounds by exchanging dollars for pounds. The demand for foreign currency is derived from individuals demanding foreign goods and services. This relationship can be applied in reverse. As individuals in the U.K. demand U.S. products, there is an increased demand for dollars. However, this raises the question of how many dollars must be exchanged to obtain the requisite number of pounds, or vice versa? In this example, the relevant exchange rate is the U.S. dollar–U.K. pound exchange rate. In general, the exchange rate is the price of one country’s currency in terms of another. The demand for British pounds relative to the supply of pounds will determine the exchange rate, just as the demand for gasoline relative to the supply of gasoline determines the price of gasoline. Exchange rates fluctuate considerably over time. However, unlike the price of gasoline, changes in the exchange rate are expressed as changes in the value of the domestic country’s currency. An increase in the value of a currency is referred to as appreciation. Analogously, a decline in the value of the currency is referred to as depreciation.For example, let us assume that the exchange rate is $2 per pound, which means that one pound costs $2. If the exchange rate increases to $3 per pound, we would say that the dollar has depreciated. Although the price has risen, each U.S. dollar is now worth less relative to British pounds. It now takes more dollars to buy a pound than it did before. If the exchange rate declines from $2 per pound to $1 per pound, we would say that the dollar has appreciated, as it now takes only $1 to buy one pound.
eBook - PDFExchange Rate Regimes
Fixed, Flexible or Something in Between?
- I. Moosa(Author)
- 2006(Publication Date)
- Palgrave Macmillan(Publisher)
The shift has led to the emergence of two thriving and interrelated industries: exchange rate forecasting and foreign exchange risk management. The problem is that forecasting exchange rates is much more difficult than predicting who will win a penalty shoot- out between England and another team in a World Cup or a European Cup quarter-final, or even the inflation rate to prevail next year. Given that exchange rate forecasting is used extensively in financial decision- making, the shift has created problems as well as opportunities for multi- national businesses and, indeed, businesses with exposure to the outside world. In fact, even businesses that do not deal with the outside world are exposed to foreign exchange risk because exchange rate changes may induce foreign competitors to enter the domestic market. International financial operations, such as capital budgeting, are much more complicated under flexible exchange rates because another dimension of risk (foreign exchange risk) is added. In the case of domestic currency financing, the cost of financing is equal to the interest rate on the domestic currency, which is known in advance. Financing in a foreign currency under fixed exchange rates means that the cost of financing is equal to the interest rate on the foreign currency, which is The Role of the Exchange Rate in the Economy 33 also known in advance. Thus, it is possible, under fixed exchange rates, to compare the two known costs and choose the cheaper financing mode (domestic currency or foreign currency financing). Under flexible exchange rates, the cost of financing in a foreign currency is equal to the interest rate on the foreign currency plus the percentage change in the exchange rate (the percentage change in the value of the foreign cur- rency). This component is not known in advance, which means that an element of risk is introduced into foreign currency financing.
eBook - ePubIslamic Capital Markets
A Comparative Approach
- Obiyathulla Ismath Bacha, Abbas Mirakhor(Authors)
- 2019(Publication Date)
- WSPC(Publisher)
The foreign exchange (forex) market is an important part of any nation’s capital market. Depending on how one looks at it, one could either consider the foreign exchange market as a component of the capital market or as a link between domestic capital markets with global capital markets. Either way, the forex market can be a key source of liquidity for a domestic capital market. Actions of participants in the forex can either increase liquidity in a domestic capital market through capital inflows or drain liquidity through capital outflows.The proper functioning of a domestic capital market and its well-being can depend, to a large extent, on equilibrium in the foreign exchange market and the national currency’s exchange rate (see Figure 13.1 ). So, what exactly are the exchange rate and the foreign exchange market?Figure 13.1. The Link Between Domestic and International Capital Markets.13.2.What is an Exchange Rate?An exchange rate can simply be defined as the price of a foreign currency in terms of a local currency. For example, when we say the MYR/USD exchange rate is RM3.56, it means that the price per US Dollar (USD) in terms of Malaysian Ringgit (MYR) is RM3.56. It costs RM3.56 to buy US$1. If exchange rates are simply prices, then just as prices change when demand, supply and other factors change, so do exchange rates. For example, if the demand for US$ by Malaysians increase, ceteris paribus , the US$ will increase in price against the Ringgit. We call such an increase an appreciation . In this case, since the US$ has increased in value against the Ringgit, we say the US$ has appreciated against the Ringgit. If the US$ has gone higher in price in Ringgit terms, it follows that the US$ price of the Ringgit must be lower. We call such reduction in value depreciation
eBook - ePubForeign Exchange
A Practical Guide to the FX Markets
- Tim Weithers(Author)
- 2011(Publication Date)
- Wiley(Publisher)
CHAPTER 5The Foreign Exchange Spot MarketTHE SPOT MARKET
The foreign exchange markets revolve around spot (that, is the FX spot market).Confusion—Right from the Start
When I first walked onto our bank’s trading floor in the United States (the floor on which FX transactions were carried out), I distinctly remember a large, rather animated man jump from his chair to his feet and yell out, seemingly to no one in particular, “I buy dollar yen!”—to which I naturally thought, “Well, . . . make up your mind.” This is but one example of a foreign exchange spot dealer communicating in their unique vernacular. This leads us, first and foremost, to consider the quoting conventions associated with foreign exchange—one of the most confusing things around!We said that the foreign exchange markets revolve around the FX spot market. Let’s be more specific about this statement in two ways.1. When we say “the foreign exchange markets” (an expression that appears in abbreviated form in the subtitle of this book), what do we mean? By identifying these as plural, we do not only mean to indicate the main geographic trading centers for the various time zones (more dispersed in AustralAsia: Wellington, New Zealand; Sydney, Australia; Singapore; Hong Kong; Tokyo and Osaka, Japan; more concentrated in Europe: London, Zurich, Frankfurt, Paris; and very concentrated in North America: Stamford, Connecticut, New York, and a couple of other locations), but also the markets for different FX products (spot, forwards, futures, swaps, options, exotics—pretty much everything beside spot being labeled “a derivative”).2. Also, let’s be explicit about what we mean by “the spot market in foreign exchange” and understand how prices are quoted in this context. Recall our earlier assertion that there are five major currencies: USD, EUR, JPY, GBP, and CHF. How are these quoted in the spot market?
eBook - ePub- (Author)
- 2021(Publication Date)
- Wiley(Publisher)
This is only an illustrative device for more easily explaining various theoretical concepts. The candidate should be aware that currency pairs are not described in terms of “foreign” and “domestic” currencies in professional FX markets. This is because what is the “foreign” and what is the “domestic” currency depend on where one is located, which can lead to confusion. For instance, what is “foreign” and what is “domestic” for a Middle Eastern investor trading CHF against GBP with the New York branch of a European bank, with the trade ultimately booked at the bank’s headquarters in Paris? The Spot Exchange Rate is usually used for settlement on the second business day after the trade date, referred to as T + 2 settlement (the exception being CAD/USD, for which standard spot settlement is T + 1). In foreign exchange markets—as in other financial markets—market participants are presented with a two-sided price in the form of a bid price and an offer price (also called an ask price) quoted by potential counterparties. The bid price is the price, defined in terms of the price currency, at which the counterparty is willing to buy one unit of the base currency. Similarly, the offer price is the price, in terms of the price currency, at which that counterparty is willing to sell one unit of the base currency. For example, given a price request from a client, a dealer might quote a two-sided price on the spot USD/EUR exchange rate of 1.1648/1.1652
Index pages curate the most relevant extracts from our library of academic textbooks. They’ve been created using an in-house natural language model (NLM), each adding context and meaning to key research topics.
