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Settlement Dates

Settlement Dates Assignment / Homework Help
Settlement date, as the name implies refers to the date on which the transaction is settled by the transferor of deposits, with reference to foreign exchange transactions. In a Spot exchange transaction, though the word "Spot" implies "immediate", it usually takes two business days for the transaction to get settled. Though the spot rate is the rate of the day on which the transaction has taken place, the execution of the transaction occurs within a maximum of two working days. But in certain cases of countries currencies, the settlement may take place the very next business day, an example being currency settlement between US Dollars and Canadian Dollars. There are two aspects involved in settlement dates: the settlement location and dealing location. Settlement location refers to the country in which the transaction has to be settled or paid and dealing location refers to the country in which the bank dealing with the foreign exchange transaction is located. If the Settlement date falls on a holiday, the next business day would be the settlement date.

Forward exchange rates are applicable for the delivery of foreign exchange at some future date, which may be specified. There are two options in forward exchange transactions. Let us assume that Emirates in UAE is purchasing aircrafts from the United States. Obviously, the settlement has to be made in US dollars. Suppose if the agreement between the two countries is to settle the payment after 2 months time, there are now two options available for Emirates, UAE: one, to remain silent now and after 2 months period, buy the US Dollars at the spot market at the then prevailing spot rate and settle the payment to the United States. In this case, the settlement date will be as per the Spot Exchange transaction. Secondly, the country can buy US dollars at the forward exchange market at the agreed prevailing forward exchange rate, which would be valid for settlement after two months period, irrespective of the spot rate prevailing at the time of settlement after two months. The second option avoids uncertainty and risk and the settlement takes place at the maturity of the forward exchange contract.

Examples of Settlement Dates Calculation:

Suppose a Spot exchange transaction is entered into on March 1st, the settlement date would generally be March 3rd. If any of the days in March 2 or 3 happens to be a holiday, the settlement date would be shifted accordingly to March 4th or March 5th. It may also happen that the settlement date falls on March 2nd with respect to transactions between certain countries currencies. These are with respect to Spot exchange transactions. Let us now take an example of a forward exchange transaction which is entered into on April 1. Firstly, the settlement date would be calculated as per the spot exchange transaction, which would be April 3rd, if no holiday falls in between. If the forward exchange contract has a maturity period of 2 months, the settlement date would then be June 3rd. In this case the month is not calculated with respect to the number of days in a month, 30 or 31. If 3rd June falls on a holiday, the settlement date would be June 4th. But, in any case, if the settlement date falls on 30th June and if that day happens to be a holiday, then the settlement date would be pre-poned to 29th June and not for 1st of July. Also, in some cases, forward exchange transactions are entered into for number of days rather than months, like 45-day contract etc. In such cases, the number of days in a month will be counted to calculate the maturity period and the settlement date of the contract.

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