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4 CHAPTER 1. SOME INSTITUTIONAL BACKGROUNDtity, and maturity or future delivery date for a foreign currency. Theagreed upon price is the forward exchange rate. Standard maturitiesfor forward contracts are 1 and 2 weeks, 1,3,6, and 12 months. We saythat the forward foreign currency trades at a premium when the forwardrate exceeds the spot rate in American terms. Conversely if thespot rate is exceeds the forward rate, we say that the forward foreigncurrency trades at discount.Spot transactions form the majority of foreign exchange tradingand most of that is interdealer trading. About one—third of the volumeof foreign exchange trading are swap transactions. Outright forwardtransactions account for a relatively small portion of total volume.Forward and swap transactions are arranged on an informal basis bymoney center banks for their corporate and institutional customers.Short-Term DebtA Eurocurrency is a foreign currency denominated deposit at a banklocated outside the country where the currency is used as legal tender.Such an institution is called an offshore bank. Although they are calledEurocurrencies, the deposit does not have to be in Europe. A US dollardeposit at a London bank is a Eurodollar deposit and a yen depositat a San Francisco bank is a Euro-yen deposit. Most Eurocurrencydeposits are Þxed-interest time-deposits with maturities that matchthose available for forward foreign exchange contracts. A small part ofthe Eurocurrency market is comprised of certiÞcates of deposit, ßoatingrate notes, and call money.London Interbank Offer Rate (LIBOR) is the rate at which banks arewilling to lend to the most creditworthy banks participating in theLondon Interbank market. Loans to less creditworthy banks and/orcompanies outside the London Interbank market are often quoted as apremium to LIBOR.Covered Interest ParitySpot, forward, and Eurocurrency rates are mutually dependent throughthe covered interest parity condition. Let i t be the date t interest rate