Outright forward foreign exchange transactions are a kind of special transaction between two parties involving foreign exchange. In this case, one party acquires a certain amount of one currency for another, which will be delivered later, but at the rate that was set at the time of the transaction. As a rule, such transactions are concluded between banks and large companies (corporate clients of the bank).
Instructions
Step 1
As a rule, the forward rate differs from the spot rate and is determined by the differential of the interest rates that are observed between the two currencies declared in the transaction. However, the forward rate is by no means a predictor of the future spot rate.
Step 2
Before starting to determine the forward rate, it is important to know that the forward quotes are always expressed in forward points for the following specific periods - one month, two, three, six months and a year (12 months). If the client wants to specify a different period, the bank, at its discretion, can give a forward rate for the period that the client wishes to prescribe in the contract. Such a contract will be called “Non-standard term contract”.
Step 3
To determine the forward rate based on the current exchange rate, add or subtract the forward points as appropriate from the quoted spot rate. In case the quotes go down - subtract. If the quotes go up - add.
Step 4
Learn a simple rule that will help you not get confused and remember exactly what needs to be done in a given situation. If the high value comes first (the “High Low” pair), the base currency is traded at a discount and the rate is: spot rate minus forward points. In a situation where the lower value comes first ("Low-High"), the base currency is traded at a premium, and the rate is the sum of the spot rate and forward points.
Step 5
Forward points are always determined by the difference in interest rates that goes between the two currencies involved in the transaction. When added to the spot rate, experts call the action "the forward rate is set at a premium." If subtracted, the action is called “the forward rate at a discount”.
