Friday, January 2, 2015

Currency Pairs in the Forwards and Futures Markets

Posted by Adi Cahyo at 1:57 AM
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For example, in the spot market, the British pound is quoted against the U.S. dollar as GBP/USD. This is the same way it would be quoted in the forwards & futures markets. Thus, when the British pound strengthens against the U.S. dollar in the spot market, it will also rise in the forwards & futures markets.

Currency Pairs in the Forwards & Futures Markets
 of the key technical differences between the foreign exchange markets is the way currencies are quoted. In the forwards or futures markets, foreign exchange always is quoted against the U.S. dollar. This means that pricing is done in terms of how lots of U.S. dollars are needed to buy unit of the other money. Keep in mind that in the spot market some currencies are quoted against the U.S. dollar, while for others, the U.S. dollar is being quoted against them. As such, the forwards/futures market & the spot market quotes won't always be parallel another.

On the other hand, when taking a look at the exchange rate for the U.S. dollar & the Japanese yen, the former is quoted against the latter. In the spot market, the quote would be 115 for example, which means that U.S. dollar would buy 115 Japanese yen. In the futures market, it would be quoted as (1/115) or .0087, which means that one Japanese yen would buy .0087 U.S. dollars. As such, a rise in the USD/JPY spot rate would equate to a decline in the JPY futures rate because the U.S. dollar would have strengthened against the Japanese yen & therefore Japanese yen would buy less U.S. dollars.

Now that you know a small bit about how currencies are quoted, let's move on to the benefits & risks involved with trading foreign exchange.

A binding contract in the foreign exchange market that locks in the exchange rate for the acquisition or sale of a money on a future date. A money forward is fundamentally a hedging tool that does not involve any upfront payment. The other major benefit of a money forward is that it can be tailored to a positive quantity & delivery period, unlike standardized money futures. Money forward settlement can either be on a funds or a delivery basis, on condition that the choice is mutually acceptable & has been specified beforehand in the contract. Money forwards are over-the-counter (OTC) instruments, as they do not trade on a centralized exchange. Often known as an �outright forward.�

DEFINITION of 'Currency Forward'

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