Certified Management Accountant Practice Exam

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What does the spot rate represent?

Future exchange rate predictions

The number of domestic currency units required to purchase foreign currency

The number of units of a foreign currency that can be received today for domestic currency

The spot rate is defined as the current exchange rate at which a currency can be exchanged for another currency for immediate delivery. It reflects the number of units of a foreign currency that can be obtained today in exchange for a specific amount of domestic currency. This rate is crucial for transactions that need to be settled immediately rather than in the future.

This contrasts with other concepts such as future exchange rate predictions, which pertain to anticipated rates in the future and do not reflect current market conditions. Similarly, while the spot rate does involve the number of domestic currency units needed for a transaction, the essential focus is on the amount of foreign currency that can be acquired immediately. Lastly, an average historical exchange rate looks at past data rather than current or immediate values, making it unsuitable as a representation of the spot rate.

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An average historical exchange rate

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