Podcast
Questions and Answers
What distinguishes a forward transaction from a spot transaction?
What distinguishes a forward transaction from a spot transaction?
- Forward transactions allow for immediate flexibility and customization.
- Forward transactions require a signed contract immediately.
- Forward transactions occur within 24 hours.
- Forward transactions are based on a fixed exchange rate for a future date. (correct)
What is the primary characteristic of future transactions compared to forward transactions?
What is the primary characteristic of future transactions compared to forward transactions?
- They do not require any collateral.
- They can be customized to any features.
- They are completed immediately.
- They involve standardized contracts. (correct)
Which of the following correctly describes swap transactions?
Which of the following correctly describes swap transactions?
- They are used primarily for speculative purposes.
- They require a fixed exchange rate for future delivery.
- They entail the immediate exchange of currencies for sale.
- They involve simultaneous borrowing and lending of different currencies. (correct)
In option transactions, what do investors have the right to do?
In option transactions, what do investors have the right to do?
What is the role of the initial margin in future transactions?
What is the role of the initial margin in future transactions?
What is the main purpose of executing a spot transaction?
What is the main purpose of executing a spot transaction?
Which term describes the rate at which a forward transaction is fixed?
Which term describes the rate at which a forward transaction is fixed?
What is a potential drawback of engaging in swap transactions?
What is a potential drawback of engaging in swap transactions?
What does the term 'Spot Exchange Rate' refer to?
What does the term 'Spot Exchange Rate' refer to?
When do forward transactions typically occur?
When do forward transactions typically occur?
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Study Notes
Spot Transactions
- Fastest method for currency exchange, settled within two days.
- No signed contract is necessary for the transaction.
- The prevailing market rate at the time of the transaction is known as the Spot Exchange Rate.
Forward Transactions
- Involves an agreement between buyer and seller to exchange currencies after 90 days.
- Fixed exchange rate is established for a specific future date.
- The established rate is referred to as the Forward Exchange Rate.
Future Transactions
- Similar to forward transactions but uses standardized contracts regarding features, size, and date.
- Requires an initial margin to be held as collateral, establishing a future position.
- Offers less flexibility compared to forward transactions.
Swap Transactions
- Involves simultaneous lending and borrowing of two distinct currencies.
- One investor borrows a currency and repays in another currency, facilitating obligation payments.
- Designed to mitigate foreign exchange risk.
Option Transactions
- Provides investors the right to exchange currency at an agreed rate on a specified date.
- Unlike forward contracts, investors are not obliged to convert the currency.
Conclusion
- Foreign exchange encompasses the conversion of one country's currency into another to settle payments.
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