Forward how to correct the currency position. How it works? Best forex brokers

The volatility of exchange rates can significantly affect the company's profits, and, in case of strong fluctuations, can lead to serious losses.

We offer traders to take advantage of effective mechanisms to protect against exchange rate fluctuations.

You can:

• Fix the exchange rate for any date in the future
• Efficiently plan your expenses on foreign exchange contracts
• Insure against losses associated with the growth or fall of rates

Currency risk protection tools

Currency forward- an urgent conversion OTC transaction for the purchase/sale of foreign currency at the rate fixed on the date of the transaction, with settlements on the agreed date in the future:

• The transaction is made at the forward rate
• On the date of the transaction, you do not need to distract cash from turnover: all settlements will be carried out on the date you choose

There are two types of currency forwards:

• deliverable (you fix the currency buying/selling rate)
• settlement (you fix the exchange rate for settlements)

How it works?

Examples of using currency risk protection tools

Example: Your company buys $1 million worth of equipment. Under the terms of the contract, you make a 20% prepayment at the conclusion of the contract, the remaining 80% you pay after the delivery of the equipment in 3 months. The exchange rate of the US dollar at the time of the conclusion of the contract - 60 rubles / dollar

Problem

Solution: you make a deal delivery forward and fix for yourself the purchase rate of dollars in 3 months - 61.8 rubles / dollar

Result: you are protected from fluctuations in exchange rates, your equipment costs are known in advance and included in the project budget. after 3 months you buy dollars at the rate of 61.8 rubles / dollar.

Example: Your company buys $1 million worth of equipment. Settlements will be made in rubles at the exchange rate of the Central Bank of the Russian Federation on the date of payment. Under the terms of the contract, you make a 20% prepayment at the conclusion of the contract, the remaining 80% you pay after the delivery of the equipment in 3 months. The exchange rate of the US dollar at the time of the conclusion of the contract - 60 rubles / dollar

Problem: you are afraid that the dollar will rise by the time you pay for the equipment, and your expenses will increase

Solution: you make a deal settlement forward and fix the rate for settlements in 3 months - 61.8 rubles / dollar

Result: you are protected from fluctuations in exchange rates, your equipment costs are known in advance and included in the project budget. If after 3 months the exchange rate is higher than 61.8 rubles / dollar, then you will receive compensation from the Bank in rubles in the amount of the exchange rate difference. You can use the received funds for settlements under the contract for the purchase of equipment.

currency option is a transaction where you buy from the Bank right(but not an obligation), to buy/sell a fixed amount of one currency for another at a certain rate at a certain point in the future.

• The transaction is carried out at a fixed rate
• No security required
• You have the right to refuse to execute the transaction if the fixed rate is unfavorable for you
• For the acquired right, you pay a commission on the day of the transaction

Example: your company is engaged in the sale of petroleum products, and you can plan a schedule for receiving foreign exchange earnings. In 1 month, a large receipt is planned - 5 million US dollars. The rate at the time of the conclusion of the contract - 60 rubles / dollar

Problem: exchange rates are very unstable and volatile. You are afraid that the dollar exchange rate will fall by the time the currency arrives, but, on the other hand, you do not want to miss out on additional income from the sale of currency if the exchange rate rises.

Solution: you enter into a currency option transaction with the right to sell the currency in 1 month at the current rate of 60 rubles / dollar. The cost of such an option is 1.23 rubles per 1 dollar

Result: after one month, you have the right to either sell dollars at a fixed rate of 60 rubles / dollar, or not exercise the option and sell dollars at the current rate of the Bank.

To use one of the instruments of protection against currency risks or get advice, please contact the specialists of Bank Saint-Petersburg

For example, if a deal is concluded now, then the date for the execution of the contract can be set after a certain date.

The term of execution for currency transactions on Forex, as a rule, is no more than a year. And those transactions, the maturity of which is more than a year, are called super-forward transactions.

Consider the main elements that a currency forward contract contains:

1. There must be an agreed transaction date. There is a time limit for a forward in the global market. Usually it has the following boundaries: a month, 3 or 6 months, a year. If the value date is irregular, then the contract may have ten days, a month and 10 days.

2. Forward rate. The exchange rates for forward transactions act as these rates. It's wide known way in order to mitigate the risk associated with changes by fixing the exchange rate.

For any foreign exchange transactions are necessary in order to maintain the value of assets in their currency terms. With the help of forward operations, you can fix the exchange rate in advance, this allows you to reduce any costs in the exchange process, makes it possible to focus on the main tasks and ways to solve them.

The exchange rate for forward transactions on Forex differs from the exchange rate for the spot market. It can be less or more than the latter by a certain number of forward points. This difference is called the discount or premium. Its level depends on the margin requirements that exist in relation to the sold / bought currency, as well as on the time limits provided for in the market for transactions with forward conditions.

Discounts are provided for currencies with a high interest rate. This means that in Forex the rates of forward contracts are lower than the quotes in the spot market. Currencies that have a low interest rate have a premium. This means that in Forex, forward transactions in these currencies have higher quotes than those in the spot market.

It is important to know that in the interbank currency market, forward transactions are sometimes associated with a floating loss. When it is equal to 80 percent of the amount of collateral on deposit, the bank informs its client that there is a need to deposit more additional funds. When the client does not want it or cannot, the bank closes the transaction forcibly. The costs are reimbursed by the client.

Schematically, the procedure for foreign exchange transactions with a bank on forward terms can be represented as follows:

1). An entrepreneur signs an agreement with a commercial bank to conduct transactions on the currency market.

2). Then he opens a currency account. The amount on the account must be at least 10 percent of the total amount of the transaction.

3). The entrepreneur writes an application for a forward transaction. It is signed by a representative of the bank, certified by a seal.

Forward contract or forward is a contract for the sale or obligatory delivery of an asset chosen by the investor at a certain time in the future. In fact, a forward contract is a fixed-term contract that must be executed by each of the parties.

All terms of the forward contract are clearly and in advance established by the parties at the time of the transaction.

Why is a forward contact needed?

A forward contract is usually entered into for the purpose of actually selling or buying the relevant asset and insuring the supplier or buyer against possible adverse price changes. Counterparties are insured against unfavorable developments, but they also cannot take advantage of a possible favorable market situation.

Initially, this type of paper was used between sellers and buyers of raw materials, materials, etc. At the moment, a forward contract is also an exchange-traded speculative paper.

Despite the fact that the forward contract assumes mandatory performance, the counterparties are not insured against the risks of its non-execution due to, for example, bankruptcy or dishonesty of one of the participants in the transaction. Therefore, before concluding a deal, partners should find out the solvency and reputation of each other.

A forward contract can be concluded with the aim of playing on the difference in the market value of assets. The person opening , counts on the increase in the price of the underlying asset, and the person opening a short position, on the decrease in its price.

According to its characteristics, a forward contract is an individual contract. Therefore, the secondary market forward contracts most of the assets are not developed or poorly developed. The exception is the forward foreign exchange market.

Forward contracts on currency and on the interest rate

Forward contracts turn into derivative instruments as the terms of the conclusion are standardized, that is, their individuality, the uniqueness of each individual contract is partially abandoned, and if there is a market intermediary (intermediaries or dealers) who becomes one of the parties to the forward contract with any other market participant. Thanks to such conditions, a secondary market for the corresponding forward contracts appears, or, as they say, the latter become liquid contracts.

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