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spot market and forward market

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Demonstrate how a UK exporter can avoid exchange risk by covering in either the spot market or the forward market. When will the exporter be indifferent between these two forms of cover?

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Dear Student,

Let us undestand clearly about spot market and forward market.

Spot Market
In this market for currency, the rate of a currency is the exchange rate that is quoted for immediate (spot) settlement (payment and delivery). Spot settlement is normally one or two business days from trade date. Though the spot exchange rate is said to be settled immediately, the globally accepted settlement cycle for foreign-exchange contracts is two days. ( this is normally the acceptable time for delivery by banks).Foreign-exchange contracts are therefore settled on the second day after the day the deal is made. Spot rates are estimated via the bootstrapping method, which uses rates based on the curent exchange rate.

Forward market
In this market, money does not ...

Solution Summary

Compare spot market and forward markets.