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4. Spot Rates, Forward Rates, and Cross Rates Types of Rates and Transactions Financial Management Outside of the U.S. > Types of Rates and Transactions Free to share, print, make copies and changes. Get yours at www.boundless.com www.boundless.com/finance?campaign_content=book_192_section_139&campaign_term=Finance&utm_campaign=powerpoint&utm_medium=di rect&utm_source=boundless

5. A spot contract is a contract of buying or selling a commodity, security or currency for settlement (payment and delivery) on the spot date, which is normally two business days after the trade date. The settlement price (or rate) is called spot price or spot rate. A spot contract is in contrast with a forward contract where contract terms are agreed now but delivery and payment will occur at a future date. The settlement price of a forward contract is called forward price or forward rate. Spot rates can be used to calculate forward rates. In theory, the difference in spot and forward prices should be equal to the finance charges, plus any earnings due to the holder of the security, according to the cost of carry model. A cross rate is the currency exchange rate between two currencies, both of which are not the official currencies of the country in which the exchange rate quote is given in. Spot Rates, Forward Rates, and Cross Rates Free to share, print, make copies and changes. Get yours at www.boundless.com www.boundless.com/finance/textbooks/boundless-finance-textbook/financial-management-outside-of-the-u-s-21/types-of-rates-and-transactions- 139/spot-rates-forward-rates-and-cross-rates-560- 740?campaign_content=book_192_section_139&campaign_term=Finance&utm_campaign=powerpoint&utm_medium=direct&utm_source=boundl ess Forward rate View on Boundless.com Financial Management Outside of the U.S. > Types of Rates and Transactions

6. Free to share, print, make copies and changes. Get yours at www.boundless.com Appendix

7. Key terms bootstrapping method In finance, bootstrapping is a method for constructing a (zero-coupon) fixed-income yield curve from the prices of a set of coupon-bearing products (e.g., bonds and swaps).Using these zero-coupon products, it becomes possible to derive par swap rates (forward and spot) for all maturities by making a few assumptions (including linear interpolation). The term structure of spot returns is recovered from the bond yields by solving for them recursively, by forward substitution. This iterative process is called the Bootstrap Method. Free to share, print, make copies and changes. Get yours at www.boundless.com Financial Management Outside of the U.S.

8. Forward rate On a share, the difference in price between the spot and forward is usually accounted for almost entirely by any dividends payable in the period minus the interest payable on the purchase price. Free to share, print, make copies and changes. Get yours at www.boundless.com Wikipedia. "Forward price." GNU FDL http://en.wikipedia.org/wiki/Forward_price View on Boundless.comGNU FDLhttp://en.wikipedia.org/wiki/Forward_priceView on Boundless.com Financial Management Outside of the U.S.

9. Free to share, print, make copies and changes. Get yours at www.boundless.com Financial Management Outside of the U.S. Which of the following is a correct definition of an exchange rate? A) A forward rate is a contract where currency is exchanged at some point in the future. B) All of these answers. C) A spot rate is a contract where currency is exchanged approximately two days after the trade. D) The forward rate is a function of the spot rate, the time until settlement, and a growth rate.

10. Free to share, print, make copies and changes. Get yours at www.boundless.comwww.boundless.com Boundless - LO. "Boundless." CC BY-SA 3.0 http://www.boundless.com/CC BY-SA 3.0http://www.boundless.com/ Financial Management Outside of the U.S. Which of the following is a correct definition of an exchange rate? A) A forward rate is a contract where currency is exchanged at some point in the future. B) All of these answers. C) A spot rate is a contract where currency is exchanged approximately two days after the trade. D) The forward rate is a function of the spot rate, the time until settlement, and a growth rate.

11. Attribution Wikipedia. "Spot rate." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Spot_rateCC BY-SA 3.0http://en.wikipedia.org/wiki/Spot_rate Wikipedia. "Forward price." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Forward_priceCC BY-SA 3.0http://en.wikipedia.org/wiki/Forward_price Wikipedia. "bootstrapping method." CC BY-SA 3.0 http://en.wikipedia.org/wiki/bootstrapping%20methodCC BY-SA 3.0http://en.wikipedia.org/wiki/bootstrapping%20method Free to share, print, make copies and changes. Get yours at www.boundless.com Financial Management Outside of the U.S.