Currency and Foreign Exchanges

Key Takeways

In this section you learned about the following:

1. An exchange rate is the rate at which the market converts one currency into another. An exchange rate can be quoted as direct or indirect.
2. The spot rate is an exchange rate that requires immediate settlement with delivery of the traded currency. The forward exchange rate is the exchange rate at which a buyer and seller agree to transact a currency at some date in the future. Swaps, options, and futures are additional types of currency instruments used in the forward market.
3. Companies routinely use these tools to manage their exposure to currency risk. Well-functioning currency markets are a component of the global financial markets and an essential mechanism for global firms that need to exchange currencies.