Difference between Spot and Forward Rate

Spot rate and forward rate are the terms used in the context of foreign exchange markets. However there are many differences between spot and forward rate, let’s look at some of those differences –

  1. In spot rate transaction the settlement of funds or delivery of currency takes place on the second working day from the day of contract while in case of forward rate transactions the settlement of funds or delivery of currency takes place on future date except spot date ( because that would be spot rate).
  2. Example of calculation of spot rate date is suppose the date of spot deal is 14th April 2014 then settlement date will be 16th April while example of forward rate date is suppose the 3 month forward contract is executed on 14th April then settlement date will be 14th July 2014.
  3. Forward rate is always either higher or lower than spot rate and it is never same as spot rate because of various factors like time value of money, demand and supply of currency, risk free interest rate, presence of speculators and arbitrageurs and so on.
  4. If the forward rate is more than spot rate then currency is said to be at premium that is currency will be more expensive in future whereas if forward rate is less than spot rate then currency is said to be at discount that implies currency will be cheaper in future.
  5. In spot rate there can be only one exchange rate whereas if forward there can be multiple exchange rates like 1 month rate or 2 month rate or 3 month rate and hence one has to be very careful while transacting in forward transaction in currency market.

0 comments… add one

Leave a Comment


Related pages


what are the advantages and disadvantages of mixed economytrial balance meaningunitary elasticity examplewhat is meaning of consigneejournal entry for bad debtsdisadvantages of online banking to customersmeaning of forfeitingfull form of tallywhat are the disadvantages of market economywhat are the advantages and disadvantages of a command economytrade discount examplefdi advantages and disadvantageskpo abbreviationjournal entry for closing stockdrawbacks of jithorizontal m&apenetration pricing advantages disadvantageshow is crr calculatedautocratic supervisiondisadvantages of functional organizational structurebenefits of cashless societydeferred revenue expendituremateriality conceptlifo benefitsexamples of price elastic goodswhat is inferior goods in economicscheque crossed generallywhat are vertical mergersconsignor definitionadjusting entry for unearned revenueadvantages and disadvantages of pricing strategieswhat is the difference between a tariff and a quotanet worth calculation formula for a companyurbanisation advantagesadvantages of federalismdisadvantages of debit cardsdisadvantages of autocratic leadershipbalance sheet disadvantagesstock market advantages and disadvantagescost push inflation is caused byadvantages activity based costingadvantages and disadvantages of electronic fund transferdividend investopediaconglomerate merger examplecibil score rangecross currency calculationwhat is privatisation in economicsadvance from customer journal entryexample of derivative marketmixed economy wikidefinition of unitary elasticadvantages of capitalism and socialismmarginal costing in management accountingwhat is inferior goods in economicscreditors journal entrycross currency calculationadvantages and disadvantages of socialismexamples inferior goodsmerits and demerits of globalisation in indian economyconsignee vs consignornormal goods and inferior goodsborder fence pros and consexplain the law of diminishing returnselling debenturesfeatures of debentureswhat are fictitious assetsdrawbacks of ratio analysisdupont analysis formulamerits of privatizationaccounting concept meaningwhat is endorseewholesale banking definitionbenefits of cashless societydemat account introductionverticle mergerthe advantages and disadvantages of social medianestle advantages and disadvantagesprofitable ratioconglomerate merger exampleswhat are the disadvantages of budgetingcash reserve ratio in indiabills discounting meaningadvantages and disadvantages of accounting ratioslimitations of absorption costingjournal entries for outstanding expenses