In the currency markets, forward contracts are transacted over the counter like through the bank. There are two participants in a forward contract, these are hedgers and speculators. Hedgers don’t typically look for a profit however rather look to stabilize the revenues or costs of their business operations. Their gains or losses are normally offset to a point by a corresponding loss or gain in the market for the underlying asset. Speculators are typically are not interested in taking possession of the underlying assets. They basically place bets on which approach prices will go. Forward contracts tend to woo hedgers than speculators.
Forward exchange cover facility is available to Importers/Exporters to mitigate exchange risks on under document credits and Import/Export Contract. Importer/Exporter can enter into Forward Contract for sale/purchase of foreign currencies with the Bank at any time from the opening/registration of the contract subject that the period of the forward exchange cover should not exceed the validity of the contract.
Forwards specify a trade between two counter-parties. There is a commitment to deliver an asset (this is the seller), at a specified forward price. There is a commitment to take delivery of an asset (this is the buyer), at a specified forward price. At delivery, cash is exchanged for the asset. In other words in a forward contract, the purchaser and its counterparty are obligated to trade a security or other asset at a specified date in the future. A forward rate is calculated by viewing the interest rate difference between the two currencies concerned. In the forward market, the currency of a nation with lower interest rates than our nations will trade at a “premium”. The currency of a nation with higher rates than ours will trade at a “discount”.
A Forward Contract is a non-standardized contract among the two parties. These contracts are very similar to futures contracts, the only difference is they are not exchange-traded or defined on standardized assets. A forward contract is an over the counter instrument which is not traded on a centralized exchange. The party agreeing to buy the underlying asset in the future is a long position, whereas the party agreeing to sell the asset in the future assumes a short position.
The advantages of the forward contract are as follows;
Forex markets are extremely volatile and thereby unpredictable. Managing forex risk requires regular monitoring of the forex markets and a lot of patience. The forex advisory team at Myforexeye contains a heap of expertise in forex risk management. With Myforexeye, firms manage their risk more efficiently.
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08 May 2020 05:21 PM
Converting one exchange rate into another at a particular price makes transferring rates. Ideally all nations should be treated as equal and there shouldn’t be any exchange rate applicable which would mean to have a universal currency.
24 Apr 2020 03:08 PM
Managing risk in a financial market is required to keep a check on the adverse movements in the instrument of the market. Particularly in the foreign exchange market.
10 Apr 2020 06:12 PM
So was India’s decision on locking down the country for 21 days required? The implication on the economic growth or rather slowdown has only made many doubt the timing and preparedness of the decision.
24 Feb 2020 05:08 PM
When they say the currency markets are volatile, it is the spot exchange rate, which is being referred to, which fluctuates within seconds.
07 Feb 2020 03:19 PM
Derivatives market enables access to financial assets for trading at a future date and not just at the market trading date. In currency derivatives the trader agrees to buy or sell a fixed amount of a specified currency at the end.
27 Jan 2020 02:13 PM
Well devaluing a currency can give a thrust to the exports and reduce the trade deficit but for any economy which has higher imports, the consequences can be on the negative too.