UGC NET COMMERCE December 2018 Q71
- Option : A
- Explanation : A foreign exchange spot transaction, also known as FX spot, is an agreement between two parties to buy one currency against selling another currency at an agreed price for settlement on the spot date. The exchange rate at which the transaction is done is called the spot exchange rate.
Forward transactions are classified by forward value date into:
∎ Short dates: maturity of one month or less.
∎ Round dates (fixed dates or straight dates): original terms to maturity of a whole number of months.
∎ Broken dates (odd dates): original maturities of less than round dates.
Forward transactions are of two types: Outright forward contracts and foreign exchange swaps (or spot-forward swaps). An outright forward contract involves the sale or purchase of a currency for delivery more than two business days into the future. Hence, the only difference between an outright forward transaction and a spot transaction is the value date. The word ‘outright’ indicates that no spot transaction is involved. On the other hand, a foreign exchange swap (which is different from a currency swap) involves a spot purchase against a matching outright forward sale (or vice versa). For example, a foreign exchange swap transaction is concluded when a trader agrees to sell a currency and simultaneously to repurchase it (thus reversing the operation) some time in the future at an exchange rate determined now. When the reversal is on adjacent days, the term rollover is used.
