Major news papers and financial and commercial reporting services report various exchange rates. These are expressed either as the number of units of domestic currency that may exchange for one unit of foreign currency.
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Such quotations are called direct rate quotations. An example of a direct quotation is, say, US$1 = DM 1.8440 or £1 = Rs 85 Exchange rates may also be quoted as the amount of foreign currency per domestic currency (indirect rate quotation). For example, in London DM is quoted as: £1 = DM 3.2600.
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For major currencies, upto five different prices may be quoted. One is the spot rate. The others may be 1 month, 3 month, 6 months and 12 months forward rates. These once again, may be expressed either in European terms (such as number of US$ per e).
Spot rate is the (exchange) rate or price one has to pay to buy currencies for immediate (spot) delivery. The time taken for spot delivery is two working days in the interbank market; over the counter if one is buying bank notes or travellers cheques.
Forward rate for a currency is the rate one will have to pat if one signs a contract, say, today to buy that currency on a specific future date (1 month from now, etc.). In the forward markets one pays for the currency when the contract matures.
The exchange rates quoted in the financial press are not the ones individuals would get at a local bank. Unless otherwise specified, the published prices refer to those quoted by banks to other banks for currency deals in excess of $1 million (interbank or wholesale market).
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Even these prices will vary somewhat depending upon whether the bank buy or sells. The difference between the buying and the selling rate is referred to as the bid ask spread The spread partly reflects the bank’s costs and profit margins in transactions; however major banks they make their profits more from capital gains than from the spread.