|
Aspect |
Spot Rates |
Forward Rates |
|
Timing |
Immediate delivery and settlement |
Agreed upon today, settlement at a future date |
|
Settlement |
Settled “on the spot” (without two days) |
Settled at a future date specified in the contract |
|
Price |
Current market price |
Agreed upon price based on market expectations |
|
Purpose |
Immediate currency exchange |
Hedging against future currency
fluctuations |
|
Rate Determination |
Supply and demand in the spot market |
Interest rate differentials and
market expectations |
|
Interest rate |
Not influenced by interest rate differentials |
Influenced by interest rate differentials |
|
Exchange rate stability |
Subject to immediate market fluctuations |
Provides certainty against future rate movements |
|
Liquidity |
High liquidity due to immediate settlement |
May have lower liquidity
depending on the term |
|
Market Participants |
Speculators, travelers, short-term traders |
Importers, exporters, long-term investors |