Forward exchange rates
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Forward Exchange Rates PowerPoint PPT Presentation


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Forward Exchange Rates. Forward Contract. A forward contract in the forex market that locks in the price at which an entity can buy or sell a currency on a future date. Also known as "outright forward currency transaction", "forward outright" or "FX forward". Currency Forward.

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Forward Exchange Rates

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Forward exchange rates

Forward Exchange Rates


Forward contract

Forward Contract

  • A forward contract in the forex market that locks in the price at which an entity can buy or sell a currency on a future date. Also known as "outright forward currency transaction", "forward outright" or "FX forward".


Currency forward

Currency Forward

  • In currency forward contracts, the contract holders are obligated to buy or sell the currency at a specified price, at a specified quantity and on a specified future date. These contracts cannot be transferred.


Example

Example

  • A U.S. firm is obligated to make a future payment of CHF 100,000 in 60 days. The firm contracts to buy CHF 60 days forward @ 1.7530. The current exchange rate is 1.7799. What is the gain or loss without this contract if the rate after 6 months is 1.6556.


Forward spreads

Forward Spreads

  • A currency is either at a forward premium or a forward discount.

  • Forward discount = Fr – Sr = -ve number

  • Forward Premium = Fr – Sr = +ve number


Annualized spread

Annualized Spread

Forward Premium

or discount

=

[Forward Rate – Spot rate] [ 360 ]

Spot Rate no. of forward days


Swap points

Swap Points

Swap Points = Spot rate x Int. diff x days

360

Forward Rate = Spot rate + Swap points


Interest rate parity

Interest Rate Parity

Interest differential ≈ forward differential

{Rd – Rf} = [Forward Rate – Spot rate]

Spot Rate

Forward= 1+Rd

Spot1+Rf


Discounting

Discounting

Discounted rate = Forward Rate

1 + i/365 * days


Forward exchange rates

QUIZ!


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