What Is a Forward Market?

The forward market refers to the market where forward contract transactions are conducted, and the transactions are settled and settled on a certain date in the future according to agreed terms. Standing orders refer to the forward foreign exchange market, because forward foreign exchange is one of the most active forward market transactions.

Forward market

Since July 21, 2005,

On August 9th and 10th, the Central Bank issued the "Notice on Enlarging the Designated Foreign Exchange Bank's Forward Foreign Exchange Settlement and Sales Services to Customers and the Launch of RMB and Foreign Currency Swap Business" and the "Notice on Accelerating the Development of Foreign Exchange Market" . These two notices are important measures introduced by the central bank after the reform of the RMB exchange rate to meet the market's need to avoid exchange rate fluctuation risks, and are a key step in the reform of the RMB exchange rate mechanism. For a long time, the lack of RMB-related derivative trading products in the market has caused the market mechanism of the RMB exchange rate to be very weak. These two notifications from the central bank have undoubtedly played an important role in promoting the marketization of the RMB exchange rate, and various sectors have long expected this. However, in the period after the establishment of the forward foreign exchange market, the trading volume is very low, and the market is almost dormant. In the first 3 trading days after the market opened, only two USD / CNY forward transactions were concluded on the first day, and the next two days closed with zero transactions. Why the market looks so deserted, our reporter interviewed Lu Hang, risk manager of the International Department of Agricultural Bank of China on this phenomenon.

Lu Hang said that the limited number of participating institutions is the primary factor affecting transaction volume. According to the People's Bank of China, as long as the bank has

In addition, further improvement of the market mechanism is the key to hindering the development of the foreign exchange forward market. As the above two notices are highly instructive and need to be detailed in the implementation details, this has also made banks wait and see. In addition, the formation of forward exchange rate prices is determined by interest rates, while the interest rate of the RMB has not been fully liberalized. If the bidder operates at a semi-marketized interest rate, the accuracy of the price reported is doubtful. At the beginning of the market, banks were clearly reluctant to take excessive risks in this regard.

Lu Hang said that under the current circumstances, participating in the foreign exchange forward market has put forward new requirements for the risk management level of domestic banks. Banks quote on the market, which means that banks must improve their ability to judge exchange rate trends. Otherwise, once the reported price deviates, banks will have to bear considerable exchange rate risks, which is undoubtedly a challenge. Under the circumstances that the domestic banking insurance pricing level needs to be improved and the market mechanism is not perfect, it is reasonable that the foreign exchange forward market is not active.