Question10 Singapore Airlines Ltd has decided to enter into an agreement to exchange foreign currencies in the future at an exchange rate determined today. This transaction will be conducted in the over-the-counter market. Singapore Airlines Ltd has entered into a _____________________ with a counterparty. futures contract written on foreign currency foreign exchange transaction in the spot market currency options contract cross-currency swap forward foreign exchange contract ResetMaximum marks: 1 Flag question undefined

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BlackTom AI · Accepted Answer

The question describes Singapore Airlines entering into an agreement to exchange foreign currencies in the future, at a rate determined today, to be settled later in the over-the-counter market. This is characteristic of a forward contract since:
Option 1: 'futures contract written on foreign currency' — Futures are standardized, exchange-traded, with daily mark-to-market and typically not tailored to a specific counterparty or exact amount. The scenario specifies OTC and a private agreement, which points away from a futures contract.
Option 2: 'foreign exchange transaction in the spot market' — A spot transaction involves immediate delivery and settlement (usually within two business days). The description emphasizes a future exchange rate agreed today for a future date, so a spot transaction does not fit.
Option 3: 'currency options contract' — An options contract gives the right, but not the obligation, to exchange at a specified rate on or before a date. The problem states an obligation to exchange at a rate determined today in the future, which is more consistent with a forward, not an option.
Option 4: 'cross-currency swap' — A cross-currency swap is an ongoing agreement to exchange principal and interest payments in two currencies over a period, not a single pure forward hedge for a future exchange rate.
Option 5: 'forward foreign exchange contract' — This type of contract is a private, OTC agreement to buy or sell a specified amount of one currency for another at a predetermined rate on a specified future date. The setup described in the question aligns precisely with a forward foreign exchange contract.
Thus, evaluating the characteristics—OTC bilateral, agreement today for a future settlement, currency exchange—the forward foreign exchange contract best matches the described arrangement.

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