Spot Foreign Exchange Contracts
The basic tools of Forex risk management are spot contracts and forward contracts which are contracts between the end users and the financial institutions that specify the terms of an exchange of two currencies. In any Forex contract there are variables that need to be agreed upon and they are:
1. Which currencies are to be bought and sold (every contract has two currencies, the one that is bought and the one that is sold)
2. The amount of currency to be bought or sold
3. The contract maturity date
4. The rate at which the exchange of currencies will occur
When you see exchange rates advertised, the rates of exchange assume a deal with a maturity of two business days ahead and a deal done on this basis is called a spot deal. The currency that is bought will be receivable in two days whilst the currency that is sold will be payable in two days. This applies to all major currencies (except the Canadian Dollar)
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