Professional Documents
Culture Documents
FOREX MARKETS Part 2
FOREX MARKETS Part 2
EXCHANGE
MARKETS
PARVESH AGHI
FORWARD CONTRACT
& RATES
BASICS
3
Forward exchange rate quotation
5
Forward Market
As with the case of spot rates, there
is a bid/ask spread on forward rates.
7
Forward Market
Annualized forward premium/discount
= forward rate – spot rate 360
spot rate n
where n is the number of days to maturity
Example: Suppose $ spot rate = Rs 76.12
one year $ forward rate = Rs 79.97
Required :
Calculate $ forward premium/ discounts %
8
Forward Market
Annualized forward premium/discount
= forward rate – spot rate 360
spot rate n
where n is the number of days to maturity
Example: Suppose $ spot rate = Rs 76.12
one year $ forward rate = Rs 79.97
Rs79.97 – Rs 76.12 x 360 x 100 = +5.05 %
Rs 76.12 360
9
Forward Market
Annualized forward premium/discount
= forward rate – spot rate 360
spot rate n
where n is the number of days to maturity
Example: Suppose £ spot rate = $1.250
90-day £ forward rate = $1.243
Required
Calculate £ forward premium /discount
10
Forward Market
Annualized forward premium/discount
11
Forward point determination
The number of ‘basis
The points are added to
points’ from the spot
the spot rate when the
rate to arrive at the
[foreign] currency is at a
forward rate are forward
premium
points(or Swap points)
13
Forward point determination
if the spot exchange
if the outright forward
rate is GBP 1 =
points are 5-8
1.6000 - 1.6010 USD
14
Forward point determination
the currency which If there is an aberration
carries lower interest to this, arbitration They are quoted to an
rate is always at a opportunity arises, accuracy of 1/100thof
premium versus the which itself will push one point.
other currency. the prices to equilibrium
15
Question
When is a foreign currency most likely trading at a forward premium?
A. When the forward rate expressed in the domestic currency is below the spot rate
B. When the forward rate expressed in the foreign/domestic currency is in equilibrium
C. When the forward rate expressed in the domestic currency is above the spot rate
A. When the forward rate expressed in the domestic currency is below the spot rate
C. When the forward rate expressed in the domestic currency is above the spot rate
Answer c
However, in customer
They are for large standard transactions, the amounts There could be an export bill
amounts with standardized are not only smaller & for for euro 12,345.67 getting
due dates i.e. end of January, odd amounts, but the due realized on 10thJanuary or
end of February and so on. date could be also a non 23rdFebruary and so on
standardized one
20
Solution
Swap Points for 2 months and 15 days
Bid Ask
Swap Points for 2 months & 15 days (e) = (a) + (d) 115 138
21
Solution
Foreign Exchange Rates for 20th June 2016
Bid Ask
66.2640 67.6083
22
solution
Annual Rate of Premium
Bid Ask
Spot Rate (a) 66.2525 67.5945
Foreign Exchange Rates for 20th June 66.2640 67.6083
2016 (b)
= 0.0833% = 0.0980%
23
Inter bank rates
The interbank market is the global network utilized by financial institutions to trade
currencies between themselves.
Most interbank trading is proprietary, meaning that it takes place on behalf of the
banks' own accounts and also it is done by banks on behalf of large customers
26
Exchange rates
Exchange rate applicable
for transaction between
two banks/forex dealers
Rates rounded to 4
is known as Inter Bank
decimal in multiples of
Rate. Normally, inter-
0.0025.
bank rates are quoted
upto 4 digit after
decimal.
Inter bank bid rate – margin = Inter bank ask rate + margin
merchant bid rate = merchant ask rate
The spot rate is the rate paid If the rate is quoted for
Exchange rates can be for for delivery within two delivery of foreign currency
spot or forward delivery. business days after the day at some future date, it is
the transaction takes place called the forward rate.
37
The Forward Market
A forward exchange rate
They agree to transact a
occurs when buyers and
specific amount of currency
sellers of currencies agree
at a specific rate at a
to deliver the currency at
specified future date
some future date.
38
The Forward Market
39
Currency forward contract
A currency forward is a binding contract in the foreign exchange
market that locks in the exchange rate for the purchase or sale of
a currency on a future date.
The other major benefit of a currency forward is that its terms are
not standardized and can be tailored to a particular amount and for
any maturity or delivery period, unlike exchange-traded currency
futures.
40
Forward Contract
Banks offer their
Forward contracts are
important customers
usually offered by
forward contracts as
commercial banks
part of their business
It enables firms to
engage in
international trade
with limited exposure
to Foreign currency
risk
41
"Your time is limited, so don't waste
it living someone else's life. Don't be
trapped by dogma – which is living
with the results of other people's
thinking."
- -STEVE JOBS
SPOT RATE on 26/08/2020 Bid/Ask: 74.217/ 74.227
Name Bid Ask BID ASK
USDINR 1M FWD 22.25 24.25 74.4395
74.4695
USDINR 2M FWD 47 49
FORECAST 2020
FORECAST 2021
Open Close
Jan 73.83 73.92
Feb 73.92 76.14
Mar 76.14 76.83
Apr 76.83 77.01
May 77.01 76.58
Jun 76.58 77.41
Jul 77.41 77.94
FORECAST
73.16-
Aug 74.90 74.27 -0.8% -0.8%
75.38
73.21-
Sep 74.27 74.32 0.1% -0.8%
75.43
72.58-
Oct 74.32 73.69 -0.8% -1.6%
74.80
72.52-
Nov 73.69 73.62 -0.1% -1.7%
74.72
72.72-
Dec 73.62 73.83 0.3% -1.4%
74.94
SPOT RATE on 26/08/2020 Bid/Ask: 74.217/ 74.227
Name BID ASK Futures Forecast
USDINR 1M FWD 74.4395 74.27
74.4695 74.2875
USDINR 2M FWD 74.687 74.32
74.707 74.4925
USDINR 3M FWD 74.932 73.69
74.952 74.7350
USDINR 4M FWD 75.197 73.62
75.217 74.9750
USDINR 5M FWD 75.472 73.83
75.497 75.2400
USDINR 6M FWD 75.727 73.92
75.752 75.5100
USDINR 7M FWD 76.017 76.042 75.7550 76.14