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# Forward Exchange Rates PowerPoint PPT Presentation

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.

Forward Exchange Rates

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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

• 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

• 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.

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

• Forward discount = Fr – Sr = -ve number

• Forward Premium = Fr – Sr = +ve number

or discount

=

[Forward Rate – Spot rate] [ 360 ]

Spot Rate no. of forward days

### Swap Points

Swap Points = Spot rate x Int. diff x days

360

Forward Rate = Spot rate + Swap points

### Interest Rate Parity

Interest differential ≈ forward differential

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

Spot Rate

Forward= 1+Rd

Spot1+Rf

### Discounting

Discounted rate = Forward Rate

1 + i/365 * days