Amity Business School

Amity Business School

Currency Forward

A currency forward is a binding

obligation instrument for physical
exchange of currency at agreed rate,
time and quantity.
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Features of Currency Forward

Not
Self
Standardize
Regulated
Contracts

Interbank Customized
transactions
to suit the
and traded
Over the needs of
counter each party
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Currency Future
Currency future market is an organized exchange market where a fixed
amount of a currency is exchanged on a fixed maturity date.

Futures may
Standardize not provide
Contracts a perfect
hedge

Transactions
Margin
made with the
deposit and
help of
daily
brokers
marking to
through the
the market
clearing house
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e.g.
Maintenance Margin
Suppose an investor buys CAN.Dollar Futures
(CAD.$100000) at USD $0.750 on Monday
morning, that matures within 2 days. At the
close of Tuesday, if the price moves up to
USD$0.755, the investor shall profit by
USD$500 { 100000 X (USD$0.755-0.750)}.
But if the price falls to USD$0.749, the
investor will have to bear the loss. The amount Margin Money
of loss will be deducted from the margin Marking to market
money. If the loss is big and the margin money
falls below a certain level, which is called as
maintenance margin, the investor receives a
margin call for depositing the margin money
within a specific period.
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As compare to futures, Forward contracts are

widely used due to the following reasons:

✓ Availability

✓ Tailored Contract

✓ Maturity
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