Tuesday, April 21, 2015

Forward Market

The forward currency market consists of two instruments: forward
outright deals and swaps. A swap deal is unusual among the rest of the
foreign exchange instruments in the fact that it consists of two deals, or legs.
All the other transactions consist of single deals. In its original form, a swap
deal is a combination of a spot deal and a forward outright deal.
Generally, this market includes only cash transactions. Therefore,
currency futures contracts, although a special breed of forward outright
transactions, are analyzed separately.
According to figures published by the Bank for International
Settlements, the percentage share of the forward market was 57 percent in
1998 (. Translated into U.S. dollars, out of an estimated daily
gross turnover of US$1.49 trillion, the total forward market represents
US$900 billion.
In the forward market there is no norm with regard to the settlement
dates, which range from 3 days to 3 years. Volume in currency swaps longer
than one year tends to be light but, technically, there is no impediment to
making these deals. Any date past the spot date and within the above range
may be a forward settlement, provided that it is a valid business day for both
currencies. The forward markets are decentralized markets, with players
around the world entering into a variety of deals either on a one-on-one basis
or through brokers. In contrast, the currency futures market is a centralized
market, in which all the deals are executed on trading floors provided by
different exchanges.

Whereas in the futures market only a handful of foreign currencies may
be traded in multiples of standardized amounts, the forward markets are
open to any currencies in any amount. The forward price consists of two
significant parts: the spot exchange rate and the forward spread. The spot
rate is the main building block. The forward price is derived from the spot
price by adjusting the spot price with the forward spread, so it follows that
both forward outright and swap deals are derivative instruments. The forward
spread is also known as the forward points or the forward pips. The forward
spread is necessary for adjusting the spot rate for specific settlement dates
different from the spot date. It holds, then, that the maturity date is another
determining factor of the forward price. Just as in the case of the spot
market, the left side of the quote is the bid side, and the right side is the offer

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