Forward Exchange Market: Key Activities & Benefits for Int'l Trade

This report critically examines the forward exchange market, focusing on its activities and benefits for international traders. It discusses the role of forward contracts in hedging against financial losses under a floating exchange rate system, alongside the impact of daily fluctuations in spot rates. The analysis covers the customization options available in forward contracts, their utility for speculation, and their non-standardized nature. The report also touches upon the importance of understanding complex derivatives and arbitrage opportunities. Ultimately, it concludes that the forward market is a valuable tool for international traders seeking to manage risk and enhance returns through strategic investments in foreign exchange markets.

FORWARD MARKET

Table of Contents
INTRODUCTION ..........................................................................................................................3
MAIN BODY...................................................................................................................................3
Reflect and discussing key activities of forward exchange market and usefulness of the market
for international traders................................................................................................................3
CONCLUSION................................................................................................................................5
REFERENCES................................................................................................................................6

INTRODUCTION
Forward market is over the counter market which fix prices for the financial instrument
and for the future delivery asset. Forward markets have multiple use like it is useful for trading
financial instruments. Forward market is used with the foreign exchange markets. This report has
discussed key activities of the forward exchange market and its useful for international traders.
Further will also discuss floating exchange rate system and spot rates.
MAIN BODY
Reflect and discussing key activities of forward exchange market and usefulness of the market
for international traders.
Forward market:
Forward market is that market which gives financial instruments and in advance only it is
priced for the future delivery. It is the foreign exchange market but it can be applied in interest
rates, securities and commodities. The exchange of forward and future contracts can happen in
forward markets. In this prices are set for the delivered financial instrument. Its prices are set on
the basis of two currencies interest rate difference at the time of trading. Forward contracts and
futures are not same, and they are different (Abbassi and Bräuning, 2020). Forward contracts are
customizable and futures are standardized.
Forward contracts are created by forward markets. For the purpose of speculation forward
contracts are to be used. Transactions of forward contracts takes place between banks and then
further banks to customers. Both future and forward contracts are given by forward market.
According to the holder's demand forwards customization can be done in forward contracts while
future contracts have standard norms related with size or maturity.
In the forward contract party can buy or sell the asset with the given time in the future and at the
predetermined price. Customization is the vital feature of forward contract. Customization can be
done on the basis of date, commodity etc. commodity involves metals, natural gas, grains etc.
forward settlement are based on the monthly cash payment or based on one time delivery (Yin,
Luo and Fan, 2017). In the forward markets, on the basis of interest rate contracts are priced.
Currency forward contracts:

It is the kind of forward contracts which are traded at foreign exchange market. Forward market
makes complex financial instruments (Blenman and Wang, 2017). Currency forward contract
means when exchange rate of purchase and sale of currency is locked for the future date. They
hedge those instruments which have no upfront payments. The contract also include agreements
which cannot be break. The advantage of currency forward is they does not have standardized
terms. So alteration can be done in the amount and in the maturity date.
Floating exchange rate:
foreign exchange rate means where the price of the currency is set by forex market and
which is completely based on the supply and demand of other currencies. It is different from
fixed exchange rates, in which government fixed the rate. This exchange rate does not include
countries. As country does not manipulate the prices of their currency. As government constantly
try to keep favourable their currency price to facilitate international trading. Short term moves
can show intervention by banks (Palwishah and Kashif, 2020). Global currencies are considered
as floating only but government interferes if currency reaches to high or low. As if the currency
reach to very high or very low than country's economic growth can be affected in the adverse
manner. So that is why government put efforts and apply measures in order to move currency to
the favourable price.
Spot rate:
Spot rate is the price which is done for urgent settlement on interest rate, currency and
security. Spot rate can be called as the spot price which is the market value of the available asset
which are available for urgent delivery at the quote moment (Patnaik, Felman and Shah, 2017).
The value of it is based on how much the buyer is willing to pay or spend and how much seller
will going to accept. The rate is depends on many factors like current market value, future
market value etc. spot prices are particular to the place and time. Securities and commodities
spot's price remains uniform in the global economy. While future and forward price is based on
the price of future delivery of asset.
Importance of forward market to international traders:
This market is useful for international traders because it will help them in doing
investments and earning returns out of that. Through forward exchange markets traders can
purchase financial instruments. Through forward markets traders can exchange future and
forward markets. As forward contracts can be customized so according to the need of the

international traders they can customize in the way they want. For the speculation purpose also
traders can use forward exchange markets. It is of non standardized nature and which can be used
for hedging purpose. The use of forwards is to exploit opportunities related to arbitrage in
carrying out different currencies. Forwards are also helpful for wider understanding of complex
derivatives products which includes swaps or options (Wong, 2020). As this contract trade at
over the counter market and does not trade on exchange. This is also beneficial for international
trader. Another advantage is if the forward market ever expires than the settlement of
transactions are done in one best way out of two ways.
CONCLUSION
Through this report it can be concluded that forward market is used for the purpose of
trading. Report has analysed key activities of forward exchange market and how useful is the
forward market for international traders. International traders can earn good returns by investing
in foreign exchange markets. Report has also evaluated spot rate and floating exchange rate.
Illustration 1: Benefits from using forward contracts
Source: See 5 Key Differences between Futures and Forward Contracts., 2020

REFERENCES
Abbassi, P. and Bräuning, F., 2020. Demand Effects in the FX Forward Market: Micro Evidence
from Banks’ Dollar Hedging. The Review of Financial Studies, forthcoming.
Blenman, L. and Wang, G.J., 2017. Liquidity, Information and the Size of the Forward Exchange
Rate Bias. Quarterly Journal of Finance and Accounting. 55(1-2), pp.53-76.
Palwishah, R.I. and Kashif, M., 2020. POSSIBLE SOLUTIONS TO THE FORWARD
PREMIUM PUZZLE: A THEMATIC ANALYSIS. New Horizons (1992-4399). 14(1).
Patnaik, I., Felman, J. and Shah, A., 2017. An exchange market pressure measure for cross
country analysis. Journal of International Money and Finance. 73. pp.62-77.
Wong, D.K.T., 2020. The forward‐looking ability of the real exchange rate and its misalignment
to forecast the economic performance and the stock market return. The World
Economy. 43(10). pp.2723-2741.
Yin, J., Luo, M. and Fan, L., 2017. Dynamics and interactions between spot and forward freights
in the dry bulk shipping market. Maritime Policy & Management. 44(2). pp.271-288.
Online
See 5 Key Differences between Futures and Forward Contracts., 2020. [online]. Available
through: <https://tradingsim.com/blog/5-key-differences-between-futures-and-forward-
contracts/>