What is forward trading?
In finance, handing trading can refer to two different activities. The first includes an agreement between two or more parties to purchase or sell a given amount of a particular asset in the future date and at a predetermined price. In this type of transaction, assets such as commodities, currencies and all types of securities are common. The second type of forward trading is illegal activity. Basically, this includes brokers of buying securities in advance when they know that the mediation house later buys a large number of securities and therefore benefits from appreciation of prices.
For various purposes, forward trading is one of the means by which corporations alleviate a possible loss, which is an act known as provision. For example, during uncertain economic times, currency rates can fluctuate widely, which can potentially damage the profits of enterprises that operate at the international level. To reduce the impact of such a wide variety of currency rates, international pins can use traded strategiesí with ahead. They may conclude an agreement with a bank or other financial institution and block a specific exchange rate.
To illustrate, consider an American company that has traffic in a Europe that expects payments or receiving the revenues denominated in EUR (EUR). Suppose in today's exchange rate one would need $ 1.4 in US dollars (USD) to buy 1 EUR. The company could have analysts that predict that in three months it would require USD $ 1.3 to buy 1 EUR, which means they would receive $ 26,000,000. Such an instance may require the company to engage in forward trading and blocking today's rate by agreement, eliminating the potential loss of $ 2,000,000.
In practice, but transactions are not so direct. One of the reasons is that it is extremely difficult to accurately predict a specific exchange rate of currency in a giventhe future date. In addition, when the Company concludes an agreement on the handover, all potential profits that could be accepted by a favorable step of exchange courses will be submitted. In all events, when companies use handling agreements, the objectives still achieve the elimination of the risk associated with extensive fluctuations in the currency rate.
illegal type of forward trading, also known as a leading run, includes brokers who use privileged information for their personal profit. For example, the broker can learn that the mediation house will buy 500,000 shares of specific shares. However, before the intermediary house can make a purchase, the broker can go out and buy 500 shares of this shares. Such a step would mean that if the intermediary house purchases the amount of shares, the stock price would increase. Tmakler would then achieve capital profits because he was able to buy shares at a relatively lower price.