What is the currency forward?
The forward currency is a forward contract whose basic asset is a foreign currency. Today, the buyer and the seller agree with the exchange rate and the date of real transaction in the future. The price of the currency is determined by the exchange rate plus the home rate without risk. The buyers and the seller are obliged to fulfill the contract, even if the exchange rates change. Currency assignment is commonly used to ensure the risk of currency or replacement.
currency attackers can be considered a non -standardized currency futures. Their two main differences are that monetary attackers are traded for the counter and not on foreign exchanges (forex) and that each element of the forward contract can be adapted. First, the amount and type of currencies to be purchased and sold must be defined. The buyer and the seller must also decide on the expiration date when the actual transaction occurs. The contract may be at any time: from the short date forward that settles in less than three months, for a long day forward that settles behind the knowce than a year.
Final specification of the currency forward is the price. The price of the contract is usually the amount of the stock exchange plus home rate without risk, which compensates for the seller for interest lost from the postponement of sales. The difference between the pre -enclosure price and the spot price is called a forward discount and takes into account the differences between domestic and foreign interest rates. There are no premiums at the front because the payment occurs on the expiry date.
currency attackers differ from other foreign exchange derivatives such as call and put, because buyers and seller are obliged to complete the transaction, even if the markets have shifted. By purchasing the currency forward, the buyer protects against unfavorable replacement thus reduces the currency risk. Another derivative product that can reduce monetary risk is the possibility of adapting the amount.
An example of how the currency is required would be if the corporation of the United StateThey entered parts that will be prepared in six months to be performed in France for EUR 100,000 (EUR). Today, the company could either buy euros, which may not ideally have an impact on the company's cash flow, or wait six months and hope that the exchange rate has not been reduced. Otherwise, the corporation could buy a currency currency, which would determine the exchange rate, the discount and the expiry date. The company is now protected from losing money if the exchange rate drops.