What is the forward line?
Forward Contract locks at a specific price for a basic asset, which could be a commodity, exchange rate or other financial instrument. When the two parties signs forward the contract, it accepts the obligation to buy or sell a fixed amount of the underlying asset to the other party at a specific price on a particular date of maturity. Instead of a specific price, the contracting contract is locked in a number of prices for a basic asset. This allows the holders to benefit from small prices and at the same time to protect themselves from larger movements. If the price of the underlying asset at maturity is below the scope, the parties will carry out the transaction at the lowest rate in the extent. If the price of the basic asset at maturity is in the range, the transaction will be the market rate. If the price of the underlying asset at maturity is above the scope, the transaction will be the highest rate at the range. The transaction will never be done below reach or abroad.
For example, American SPolyness expects to buy a pound of Great Britain (GBP) and the US dollar (USD)/GBP is currently 1.6273. The company can close the range with a band from 1.6000 to 1.6400. At the end of three months, in the due date, if the USD/GBP rate is below 1.6000, the company will buy a currency for $ 1.6000/GBP. If the USD/GBP rate is between 1.6000 and 1.6400, the company will buy it for the prevailing exchange rate. If the USD/GBP rate is more than 1.6400, the company will pay $ 1.6400/GBP.
The holder of the transfer contract often uses it to secure or protect the position in the underlying asset. For example, the Company expects to earn revenue or make a foreign currency payment and wmravense to ensure that they do not suffer from losses due to the exchange of exchange courses. A farmer who produces a commodity can also sign a row contract to ensure a minimum price for its further harvest.
Often there are no costs for concluding the Assignment Agreement. Parties that have a contractBetween two parties, the parties can adapt the conditions to suit their preferences. The disadvantage of the transfer agreement is that the floor rate, which is the lowest rate in the specified extent, is usually lower than the rate of a simple forward contract. Also, the holder cannot take full advantage of the favorable movement of prices due to the existence of the ceiling rate.