instruments in interest-rate, currency and ... - Volksbank AG

FOREIGN EXCHANGE SPOTS ANDFORWARD EXCHANGE TRANSACTIONSWhat is a foreign exchange spot?The most simple and uncomplicated transaction related to currency risk management is the foreign exchange spot.Companies which have receivables or payables denoted in foreign currencies as a result of their foreign tradingactivities can convert foreign currency debits and credits into their book currency via foreign exchange spots.Spot transactions are traded on the spot exchange market. This market determines the exchange rates of the freelyconvertible currencies among one another. Trading occurs around the clock; the rates change continuously andquickly. The exchange rate movements result in a continuous change in the amount of foreign currency receivablesand payables.In a standard spot transaction, one currency is exchanged for another. The exchange ratio is determined by thecurrent exchange rate. The counterparties are obligated to exchange the negotiated sums. The standard rule fordelivery and payment on the spot exchange market is two working days after the transaction is concluded (spotdate). That is the period required in order to be able to conduct payments and transactions around the world ina timely manner.Price range (spread) and calculation of cross-currency ratesDifferent prices are applied depending on the type of underlying transaction (purchase or sale of foreigncurrency).The bid price is the price at which the key currency can be sold.The ask price is the price at which the key currency can be purchased.The interbank spot price is the price at which the banks can trade among one another. Corporate and privatecustomers can also trade at the interbank rate plus/minus a certain margin.The key currency in the interbank market is the euro; however, so-called cross-rates (e.g. CHF/JPY) are alsoneeded. These are calculated using the chain method:The chain method is illustrated as a rule of three. The question of the unknown is the starting point. In themiddle, there is a vertical fraction bar. The value sought on the left side is the question; the counter currencyper unit is on the right side. Each subsequent element on the left begins with the same designation with whichthe element on the right in the previous line ended. The last element on the right must have the samedesignation as the first element on the left. Every member having the same value with the same designation leftand right is cancelled out of the equation. Finally, the calculation is made: The product of the members of theright side is divided by the product of the left side.36