Spot And Reciprocal Rates

The rate used in a spot deal is the spot rate and is the price at which one currency can be bought or sold, expressed in terms of the other currency, for delivery on the spot value date.

The ratio at which one currency is exchanged for another for settlement in two business days (value date) is called the spot exchange rate.

The spot exchange rate can be expressed in either currency, thus this price has two parts, the base currency and the equivalent number of units of the other currency. For example, a rate for the US dollar against the Swiss franc would be quoted as 1.6703. This means there are 1.6703 Swiss francs to 1 dollar. When one rate is known, the spot exchange rate expressed in the other currency (the reciprocal) is easily calculated. The price of 1 dollar, expressed in Swiss francs, is 1/$0.5986 or Sfr 1.6703. Although some newspapers calculate and publish both exchange rates, it has become a standard market practice among traders to quote the foreign exchange for most currencies as the amount of foreign currency that will be exchanged for 1 dollar. For example, if a bank trader was asked to quote a rate for Swiss francs against the dollar, the response would most probably be sfr 1.6703 rather than $0.5986. In this case, 1 dollar is the traded commodity and the trader is quoting the price in Swiss francs. This type of quotation is known as 'European terms'.

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