Currency spot rate and forward rates | What is the difference

On the currency market exchange rate or the price of a currency in relation to another is a kind of report card in the country issuing the currency, an assessment of the state of its economy and its solidity. It is still not absolute values but a relationship between two different currencies. Speaking of currencies, it is essential to know the difference between the spot rate and forward rates. The spot exchange rate is the trading price of those transactions involving the purchase or sale of foreign currency in which the collection and payment of the quantity traded is the second business day after the date of the sale.

Currency Rate

Currency Rate

The forward foreign exchange also known as forward exchange rate is the trading price of those transactions in which the withdrawal and payment of the amount treated is from the third business day after the date of the sale. We are therefore faced with a purchase or a sale whose delivery is deferred despite being priced instantly.

The spot rate and the forward rate are values that express the outlook and the trend of a particular currency and the economy that it represents. They are also the tools that are used by exporting companies to cover the so called exchange rate risk, the risk that when the payment of a commodity is deferred over time the currency has appreciated or depreciated in the meantime and then the outlay is greater or less than budgeted. Therefore, to reset the exchange rate risk, using the forward exchange rate allows you to lock in the price at a specific rate.

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