Description:-
FX Spot(foreign exchange transaction), 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.
Example:-
XYZ Company purchases components from a Japanese supplier at a cost of JPY 9 million. The invoice is due in 30 days.
XYZ Co: Buys JPY / Sells USD
Amount: JPY 9.0 MM
Spot Rate: 0.01087
Two days prior to the invoice due date XYZ Co will enter into a Spot transaction withABC BANK where XYZ Co. will exchange 0.01087 USD per each JPY received. In this example XYZ Co will exchange USD 97,830 withABC BANK and receive JPY 9.0 MM on Value Date to fulfill the invoice.
Why are they traded?
Typically Spot trades are the most liquid and transparent of all foreign exchange market tools.
Immediately translates foreign currency balances to a client’s main operating currency allowing for higher productivity uses and advantageous interest rates.
Client remains exposed to fluctuations in exchange rates from the date of realization of the foreign liability or asset until the FX Spot trade date.
Life cycle events: –
Notional amounts are exchanged on the maturity depending upon the FX rate during that time.
OTCWIRE 