Meaning of Ready, Spot and Forward Transaction - Forex Management

In the case of foreign exchange, there is the element of time between striking the deal and the transaction of the actual deal. The Transaction in the interbank market take for the settlement either (a) on the same day itself; or (b) it may take two days later; or (c) it may take a longer time, say after a month or two. Based on the nature of deal, the following are the three transactions are estimated.

Ready Transactions: In cases where the agreement to buy and sell the foreign exchange takes place and actual settlement is finished (i.e., delivery of foreign exchange and the receipt of the price, i.e., exchange transaction proper is completed on that day itself, it is called ready transaction. It is also known as Value today.

Spot transaction and Forward transaction

Spot Transactions: In some transactions, the deal will be struck; but the actual exchange of currencies will take place, say, after two days from the date of contract. This type of transaction is known as Spot Transaction. For example, if the contract for certain amount of foreign exchange is made on an agreed rate, say on Monday, the actual delivery, i.e., completion of transaction will take place on Wednesday. If that day happens to be a holiday, the delivery will take place on the very next day, i.e. Thursday, it is on this day, the contract is fulfilled by paying rupees and receiving dollars or vice versa.

Forward Transaction: On the other hand, the deal will be struck on a particular day, wherein rate will be agreed upon. But the actual transaction will take place at a specified future date. This is called Forward Transaction. The Forward Transaction may be for one month, two months or even three months. This means, the actual contract will take place on a particular day. This forward contract for delivery of currencies will take place after one month, two months or three months decided according to the contract.

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