The Spot Exchange Rate Is the Foreign Currency Exchange Rate on a Particular Day

The spot exchange rate is the foreign currency exchange rate on a particular day. Spot rates usually change every minute. A forward exchange occurs when two parties agree to exchange currency and execute the deal at some specific date in the future. Yen is one of the most traded currencies in the world especially due to its low interest rate since the Yen is used in carry trades. As of 1/11/17  3pm spot exchange rate is 1 US Dollar equals 115.42  Japanese Yen (100,000 Yen equals $866.36). Forward exchange rate for the next 30 days is 1 US Dollar on average will be equal 115 Japanese Yen (100,000 Yen will be equal $869.56). We can see a tendency of dollar’s depreciation against the yen over the next 30 days which means market expects the dollar to depreciate against the yen in the next 30 days. It means that we will need to spend more dollars in 30 days in order to acquire the amount of yen required.  In current spot exchange rate we require $866.36 if we will decide to use forward exchange rate in 30 days we will require $869.59 to acquire 100,000 Yen so it makes sense to use spot exchange rate due to a tendency of  dollar depreciation against yen. Changes in spot exchange rates can be problematic for an international business because of the changes in the exchange rate which could lead to turning profitable deal into unprofitable. In general to reduce foreign exchange risk firms use forward exchange rates but in our case it will be better to use the spot exchange rate.

As of January 11, 6:02 PM, the USDJPY spot exchange rate was 1 JPY = 0.00866494 USD, and the forward exchange rate (1 month) was 1 JPY = 0.008678 USD. Hence, 100,000 JPY in spot exchange rate = 866.494USD; while in forward exchange rate, 100,000 JPY = 867.80 USD.

The factors that influence the spot exchange rate is the demand and supply of the yen in relation to the demand and supply of the dollar. If the demand for the dollar is high while its supply is short, and the demand for the yen is short and its supply high, the spot rate will change, causing the dollar to appreciate against the yen.

The factors affecting the forward exchange rate are related to inflation, interest rate, and market psychology. If inflation is higher in the US than in Japan, the dollar depreciates against the yen. Interest rates can tell you a lot about inflation: interest rates are high in countries where inflation is expected to be high. Hence, by comparing the differences between interest rates in the US and Japan, we can predict where inflation is expected to be higher or lower. The last factor influencing the forward exchange rate is market psychology, which is shaped by political factors and microeconomic events.

Although the difference in the spot and forward exchange rates are not significant, to avoid any risks related to future exchange rate movements, I would choose the forward exchange rate.  

As of Jan 12th at 9:02pm, the spot exchange rate was:

$1US = 114.995 JPY  (100,000 JPY = $869.90 USD)

The forward rate:

30 days - $1US = 114.84 JPY (100,000 JPY = $870.77 USD)

Based on the information above, the difference between the current spot rate and the forward rate is minimal.  However, it would be in my best interest to lock in at the 1 month forward rate just in case the Yen appreciates, thereby causing the dollar amount needed to purchase 100,000  JPY to increase.