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The Foreign Exchange Market Concepts 1Value Date The settlement of a transaction takes place by transfers of deposits between two parties The day on which these transfers are effected is called the Settlement Date or the Value Date 2Spot Rate When the exchange of currencies takes place on the second working day after the date of the deal it is called spot rate 3Forward Transactions If the exchange of currencies takes place after a certain period from the date of the deal more than 2 working days it is called a forward rate A trader may quote a forward transaction for any future date It is a binding contract between a customer and dealer for the purchase or sale of a specific quantity of a stated foreign currency at the rate of exchange fixed at the time of making the contract 4 Swap Transaction A swap transaction in the foreign exchange market is combination of a spot and a forward in the opposite direction Thus a bank will buy DEM spot against USD and simultaneously enter into a forward transaction with the same counter party to sell DEM against USD against the mark coupled with a 60- day forward sale of USD against the mark As the term swap implies it is a temporary exchange of one currency for another with an obligation to reverse it at a specific future date 5 Bid Rate The bid rate denotes the number of units of a currency a bank is willing to pay when it buys another currency 6Offer Rate The offer rate denotes the number of units of a currency a bank will want to be paid when it sells a currency 7Bid - Offer Rate The bid offer Rate is the rate which states both the price which is the bank is willing to pay to buy other currencies and the price the bank expects
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