The spot and forward exchange rates

The spot exchange rate

The spot exchange rate is the quotation between two currencies for immediate delivery.In other words, the spot exchange rate is the current exchange rate of two currencies vis-à-vis each other.In practice, there is normally a two-day lag between a spot purchase or sale and the actual exchange of currencies to allow for verification, paperwork and clearing of payments.

The forward exchange rate

In addition to the spot exchange rate it is possible for economic agents to agree today to exchange currencies at some specified time in the future, most commonly for 1 month, 3 months, 6 months, 9 months and 1 year.The rate of exchange at which such a purchase or sale can be made is known as the forward exchange rate.Exactly why economic agents may engage in forward exchange transactions and how the forward exchange rate quotation is determined are a subject we shall look at later in this chapter.