ABSTRACT
Foreign exchange transactions generate capital flows which carry with them inherent economic risk. This risk may be either eliminated or exploited through the selective use of different types of foreign exchange rates and trading techniques. Transactions involving the purchase and sale of foreign exchange for delivery within two working days are conducted in the spot exchange market and are referred to as spot transactions. Forward exchange rates are determined by the forward demand for and forward supply of foreign exchange. Speculation is a difficult trading technique to identify with certainty, since it is impossible to identify positively the deliberate intention to reap foreign exchange gains. Arbitrage is also important to foreign exchange markets because it links them to domestic capital markets. Arbitrageurs thus profit from temporary differentials whose very existence is destroyed by their currency purchases and sales which respectively pull up and force down exchange rates to common levels.
