Spread means the difference between banks’s buying (bid) and selling (offer or ask) rates
in an exchange rate quotation or an interest quotation. It fluctuates according to the level
of stability in the market, the currency in question, and the volume of the business. Thus,
if there is a degree of volatility in an exchange rate, and if business is thin and if (rumors
persist about the currency that) the current rate is rumored to be unsustainable, the dealer
will protect himself by widening the quote. That is, he will offer less currency while
selling but demand more when buying. The spread represents the gross return to the
dealer for the risks inherent in “making a market”.
Cash rate is the price of any currency other than home currency. In other words, it is the
direct relationship between two non-home currencies in a foreign exchange market
concerned with or used in transactions in a country to which none of the currencies
belongs.
Cash rate or Ready rate is the rate when the exchange3 of currencies takes places on the
date of the deal. If delivery is made on the day the contract is booked, it is called a
Telegraphic Transfer (TT) or cash or value-day deal.
When the exchange of currencies takes place on the next working day after the date of
deal, it is called the TQM (tomorrow) rate.
When the exchange of currencies takes place on the second working day after the date of
the deal, it is called the spot rate. This time is allowed to banks to process the necessary
paperwork and transfer the funds. Such transfers to and from banks will be effected
when their overseas currency accounts are either credited or debited, depending on
whether the bank is buying or selling. The rate of the agreed deal on telephone is called
the contract date; the value date is the one when the deposit is credited or debited.
Normally, a deal done on Tuesday will settled on Thursday and a deal done on Friday
will be settled on the following Tuesday. A business day is defined as one in which both
banks are open for business in both settlement countries. Most dealings now-a-days are
done “spot”.
The major currencies quoted on the forward market are given below. They are generally
in terms of the US dollar.
- Deutschmark
- Swiss franc
- Pound sterling
- Belgian franc
- Dutch guilder
- Japanese yen
- Peseta
- Canadian dollar
- Australian dollar