Spot exchange rate is the price at which currencies are traded for immediate delivery or in two days in the interbank market. It is also known as benchmark rates, straight forward rates, or outright rates. It represents the price a buyer expects to pay for a foreign currency in another currency. Although the spot exchange rate is said to be settled immediately, the globally accepted settlement cycle for foreign-exchange contracts is two days, after the deal is made.

An example found in the article “Stocks in Bumpy Ride Lower” tells us that reacting to a drop in oil prices that preceded a sharp extension of gains in the dollar against the euro. Since the dollar will buy more than the euro, it is suggested to have those oil buyers used the spot exchange rate for these types of oil transactions. By doing so, it will help them prevent losses from the euro hitting low against the dollar. It will give more purchasing power. As the European Central Bank president Jean-Claude Trichet says “is right to focus on exchange rate volatility, not on the absolute strength.

Now, on the other hand the dollar is not worth more than the yen. Back in 1905, America was the rising power. Now, it is America that looks uneasily on the rise of a potential challenger. President Barack Obama faces a China that is growing richer and stronger while remaining tenaciously authoritarian. Its rise will be far more nettlesome than that of its own country a century ago. China has become the world’s biggest lender to America through its purchase of American Treasury securities, which in theory would allow it to wreck the American economy. Although this is a theory; the dollar continues to be seen as a safe haven play.

As we can see, these articles show us how by using the spot exchange rate on foreign trades and on purchase it’s a secure way not to lose money and to make business between two countries safer.

References:

Http://online.wsj.com/article/SB125658669865308785.html

http://www.economist.com/specialreports/displayStory.cfm?story_id=14678579&source=most_recommended

http://online.wsj.com/article/SB125655356470307903.html