Foreign Exchange

Question 1

What is a country’s ‘current account’? (foreign exchange)

Answer 1

Broadly covers trade payments, though it also includes tourist expenditure and most important, interest payments and dividends.

Question 2

What is a country’s ‘capital account’? (foreign exchange)

Answer 2

Largely concerned with the purchase of assets: foreign securities, shares or physical assets

Question 3

What is the spot rate? (foreign exchange)

Answer 3

This is the rate at which currencies can be exchanged immediately

Question 4

What is the spread? (foreign exchange)

Answer 4

This is the difference in the prices for which currencies can be bought or sold. The faster an exchange rate is moving the wider the spread will be. Tourists will often find a very wide spread since they have little bargainin power and the costs of providing smaller amounts are proportionally higher.

Question 5

What are forward rates? (foreign exchange)

Answer 5

Forward rates are an agreement of exchange rates for some point in the future. Currencies which are more expensive to buy at a forward rate than the spot rate are described as at a premium, whereas if they are cheaper at the forward rate than the spot rate they are at a discount.