Exchange forward. Features of a forward agreement. What is the difference between a futures contract and a forward contract?

Forward transactions(forward operation or abbreviated as fwd) are currency exchange transactions at a pre-agreed rate that are concluded today, but the value date is postponed to a certain date in the future. In this case, the currency, amount, exchange rate and payment date are fixed at the time the transaction is concluded. The duration of forward transactions ranges from 3 days to 5 years, but the most common dates are 1, 3, 6 and 12 months from the date of the transaction.

A forward contract is banking contract, therefore, it is not standardized and can be tailored to suit a specific operation. The market for forward transactions with a maturity of up to 6 months in major currencies is quite stable, for a period of more than 6 months it is unstable, while individual transactions can cause strong fluctuations in exchange rates.

The forward rate is composed of the spot rate at the time of the transaction and the premium or discount, i.e. premiums or discounts depending on the interest rates of the interbank market for a given period.

The forward rate is usually different from the spot rate and is determined by the interest rate differential between the two currencies. The forward rate is not a prediction of the future spot rate. If the forward contract is executed before 1 month, then it is considered to be concluded for short dates.

Forward transactions are used in the following cases:

Hedging (insurance) of currency risks;

Speculative operations.

Hedgers attempt to reduce the risk of changes in future prices or interest rates by entering into forward contracts that guarantee the future exchange rate. Hedging does not increase or decrease the expected returns of a market participant, but only changes the risk profile. The principle of hedging is that the movement of foreign exchange market rates is compensated by an equal and opposite movement in the price of the hedging instrument.

The bank can insure the risks of its clients. For example, foreign trade organizations that have payments and receipts in different currencies, using forward contracts, are also able to insure the risk of changes in exchange rates. If a company knows the sales and purchase schedule well, it can hedge the risk of a possible change in the exchange rate in an unfavorable direction, while, knowing the exchange rate in advance, the company is able to calculate its future costs and outline the correct investment and pricing policy. The forward contract market is much more popular abroad than in Russia.

Let's assume that an American importer of German cars must pay for the delivery in EUROs, but will sell the cars in dollars. In this case, the importer must negotiate with the German manufacturer the cost of delivery in EURO and calculate the selling price in US dollars. The importer's risk is that in the time interval between the moment of concluding a contract in EURO and the actual sale of goods in US dollars, the dollar exchange rate may fall. As a result of the depreciation, the importer will need a larger amount in US dollars to recover the contract costs incurred in EURO. However, when entering into a forward contract, the importer will know exact amount in US dollars, necessary for conversion into EURO under the contract, as well as the selling price of the imported product, taking into account the receipt of a guaranteed profit.

If, for speculative purposes, a dealer buys EUROs for US dollars for a month at the rate of EUR / USD 0.9926, and after a month the spot rate is equal to EUR / USD 0.9960, then this operation will bring profit to the bank. For example, a foreign exchange dealer buys EUR 10 million at a forward rate of EUR/USD 0.9926 for a period of 1 month for the purpose of speculating on the exchange rate. A month later, on the value date, the bank will receive EUR 10 million and pay USD 9,926,000.

If on the value date the spot rate on the market is EUR / USD 0.9960, then the dealer will sell EURO 10 million for dollars and receive USD 9,960,000. As can be seen from this example, the transaction resulted in a profit for the bank of USD 34,000 as a result of the fact that the dealer considered that the quoted EUR/USD forward rate was supposedly better than the future spot rate on the value date of the forward contract. However, if the spot rate is EUR/USD 0.9908, then selling the EURO will result in a loss. Opening currency positions in the forward market is also associated with risk, as in the case of other speculative transactions.

Forward outright rate = spot rate ± forward points

Forward points are also called swap points, forward difference or swap difference.

If the forward rate is greater than the spot rate (FR > SR), then the currency is quoted at a premium if FR< SR , то валюта котируется с дисконтом.

There are a huge number of financial instruments in the economy. Let's talk about one of them. A forward contract is essentially an agreement entered into between two parties that details the purchase or sale of a specific quantity of an underlying asset at a clearly stated price, with a timeframe for the implementation of the agreement in the future, inclusive. Signing this type of agreement means that one of the parties to the transaction, the seller, undertakes to deliver a specific amount of underlying assets on the date specified in the agreement, but which is distant from the date of signing the agreement. The other party, the buyer, undertakes to accept delivery within the agreed time frame.

Main characteristics of contracts

The date on which the forward contract is signed is called the agreement date. The date determined by the parties as the time of implementation of the agreement is called the payment or settlement date. The time period from the moment of signing the contract to the moment of settlement is called forward. Agreements can be concluded for any period and amount of funds, everything depends solely on the needs of each party. The most effective are considered to be forward transactions, the cost of which starts from $5 million. Within the international derivatives market, contract amounts vary from 1 to 100 million. Each of the parameters - the date of signing the contract and the settlement date, the transaction amount and the volume of the underlying asset - are determined purely on an individual basis. There are no restrictions in this matter.

Risk hedging

Thanks to the preliminary determination of the contract value, it is possible to hedge risks. By establishing the value of a financial instrument, both the seller and the buyer are completely freed for the forward period from the risk of changes in market value. The transaction does not provide the opportunity to acquire certain benefits. The seller does not receive a material advantage in the event of an increase in the value of an asset on the market, and the seller does not receive a material advantage as a result of a fall in the same asset. If this situation occurs, then one of the parties may refuse its obligations, as it gets the opportunity to complete a transaction on more favorable terms. Contracts are defined as firm forward transactions. It is the obligation to fulfill one’s part of the agreement that underlies them; without this feature, the instrument would cease to exist as a direction for hedging risks.

Story

Forward transactions first appeared about 400 years ago. They had the format of agreements on the sale of the future harvest. Over the past few decades, contracts have become especially popular, the main subject of which is financial instruments. The financial forward market is essentially an over-the-counter market. Exchange trading is unacceptable due to the individuality of the terms of agreements. Formally, any business entity can participate in contract trading. In practice, the choice of partner is carried out very carefully and carefully, as it reduces the risk of delivery failure.

Forward market participants

For the most part, the parties to the agreements are large banks and pension funds, insurance companies that have a positive reputation. Certain categories of transactions are subject to certain restrictions. An example is forward credit transactions, in which one party must have an open line of credit with the company that is the other party to the arrangement. Private entrepreneurs can also act as bidders, but they must have a strong material base and be active participants in global financial life.

Who determines the mood in the forward market?

The most active players in the forward market are banks. They actively use a forward contract for the purchase of currency to hedge their own risks associated with changes in the value of financial instruments. Financial institutions offer this type agreements for a similar purpose with their clients. Thanks to wide financial opportunities in terms of distribution and attraction of material resources, banks, unlike other trading participants, avoid real losses even if market prices do not play into their hands. By concluding two opposite contracts, the bank can easily cover a loss on one transaction with a profit on another. Banks can also act as intermediaries, who help find market participants with opposing desires.

Specifics of contract trading

Trading forward contracts does not have a clear organized structure. Low competition in this segment of activity gives banks certain advantages in the form of the opportunity to impose their terms of partnership on participants in agreements. The profit that forward foreign exchange contracts can generate depends in large part on the ability to predict the future value of the asset that forms the basis of the agreement.

Banks benefit here because they have access to a huge amount of information and they employ professional analysts. This leads to the formation of a huge and active market of offers, the over-the-counter stock market. Forward contracts can be signed not only for a real amount of funds, but also for a conditional one. In the latter situation, after the implementation of the agreement, in the event of a difference in the contract and market value of the underlying asset, one of the parties pays the other only the price difference. Actual exchange of currencies, shares, valuable papers and other financial instruments do not occur.

Pros of contracts

A forward contract is a universal financial instrument that has certain advantages over others similar to it. The main advantage of the transaction is its individual nature, which allows for very professional risk hedging. Forward agreements do not provide for the withdrawal of additional funds or commissions. As for the privileges for banks, we can note the ability to set the value of the underlying asset and dictate their own terms of agreement, since operations are over-the-counter in nature.

Cons of contracts

The main disadvantage of the contract is the lack of room for maneuver. The obligation of the parties to fulfill their part of the agreement does not allow terminating the contract before the established deadline or modifying its terms. The absence of a secondary forward market makes resale of the contract simply impossible. This leads to a fairly low liquidity of the instrument with a too high risk of failure by one of the parties to fulfill its obligations. Strict trading frameworks forced market participants to look for loopholes. For example, today it is a very common practice to conclude contracts that provide for the possibility of terminating contracts by agreement of two parties or on the initiative of one, but with subsequent payment of compensation.

What limits the number of participants in the forward market?

The number of participants in the forward market is strictly limited by a whole set of norms and standards. In order to purchase or sell a forward contract, trading participants must have credit line, high rating and stable financial contacts with a banking institution. The disadvantage of forward transactions for participants is due to disabilities when choosing a partner bank, you have to accept the conditions that financial institutions actually dictate. Certain difficulties are also associated with finding partners, because finding a side that is ready to take the opposite position is not so easy. This leads to a lack of popularity and activity in the forward contract market.

What is the difference between a futures contract and a forward contract?

Future value contracts are forwards and futures. There is a significant difference between them. A forward is signed between a buyer and a seller, with the main purpose of the partnership being the actual delivery of the asset. Forward agreements are implemented within the over-the-counter market, which leads to low liquidity of the instrument compared to futures. For example, it is very difficult to find a buyer for hundreds of tons of metal if it is no longer relevant for a particular plant.

Futures, in comparison with forwards, act as a standardized contract, the main purpose of which is speculation. There is no talk of any real delivery here. Forwards and futures, despite their apparent similarity, are used for opposite purposes. The term “standardized” refers to a clear limitation of the quantity of goods by the conditions of the exchange. Only whole lots are allowed for trading. For example, a lot of copper is 2500 pounds, and a lot of wheat is 136 tons. Options, forwards and futures are financial instruments, but the purpose of their existence is different, which determines the specifics of their application.

Forward currency contracts

The general characteristics of a forward currency contract provide for preliminary clarification of the terms of the partnership according to the following parameters:

1. Contract currency.
2. Transaction amount.
3. Exchange rate.
4. Payment date.

The duration of forward transactions can vary from 3 days to 5 years. The most common contract terms are 1, 3, 6 and 12 months from the date of conclusion of the contract. A forward foreign exchange contract inherently belongs to the category of banking transactions. It is not standardized and can be adapted to any situation. The market for forward transactions, the duration of which does not exceed 6 months in the dominant currency pairs, is very stable. The segment of the market in which transactions are concluded for 6 months or more is characterized by instability. Any implemented long-term transaction may cause significant fluctuations in rates on the foreign exchange market.

Types of forward transactions

A forward contract can be presented in two formats:

1. A simple forward transaction, or outright agreement. This is a single conversion transaction that has a clear value date that differs from the spot date. The situation does not provide for a simultaneous reverse transaction. An agreement is concluded between the parties to provide a certain amount for a clearly established term and at a fixed rate. This transaction format is widely used to hedge against exchange rate volatility.
2. Swap transactions. This tandem is opposite to conversion-type transactions, which have different value dates. Currency operations between banks act as a kind of combination between the purchase and sale of one currency, but in completely different time periods. A certain amount in the equivalent of one currency is simultaneously sold and bought on the market for a clearly established period and vice versa.

When considering the question of what a forward contract is, it is worth clarifying the fact that these types of agreements use a specialized forward rate, which is radically different from the spot rate. The reason lies in the differences between interest rates on deposits offered by countries. A specialized formula is used to calculate the forward rate.

2. Use of forward transactions by importers

3. Forward transactions with credit and financial instruments

1. A forward transaction refers to forward transactions in foreign currency. Urgent currency transactions - These are foreign exchange transactions in which the parties agree on the delivery of a specified amount of foreign currency within a certain period after the conclusion of the transaction at the rate fixed at the time of its conclusion.

Forward foreign exchange transaction - sale or purchase of a certain amount of currency with a time interval between the conclusion and execution of a transaction at the exchange rate on the day the transaction was concluded. Forward foreign exchange transactions are carried out outside the exchange. Parties forward transactions are usually carried out by banks and corporations.

Example. The exporter sells his foreign exchange earnings to the bank on February 10 at the rate of 1 USD = 1.5346 DM per month. The bank sets for itself a premium of 2%, taking into account which the forward transaction rate will be determined as: dollars, or 200,000 x 1.5346 = 306,290 marks;

100 15346000 - 306290 = 15039710 marks;

Forward transaction rate
DM

When making payments for the export-import transaction on March 10, the dollar exchange rate was 1 USD = 1.3966 DM. The exporter's bank, with which he entered into a forward transaction, pays the difference between the forward transaction rate and the market rate: (1.5039 - 1.3966) x 10,000,000 = 1,073,000 marks.

The exporter's losses from the fall in the exchange rate of the contract price amounted to:

(1.5346 - 1.3966) x 10000000 = 1380000 marks.

Taking into account the difference paid by the bank, the amount of losses decreased to 307,000 marks. The bank's losses amounted to 1,073,000 - 306,290 = 766,710 marks. Thus, from the considered example it is clear that the bank, accepting the obligation to buy currency from the exporter at the forward rate, suffered significant losses.

2. Forward foreign exchange transactions are also used importers. If the exchange rate of the currency in which the importer makes payments under the contract is expected to increase, then it is profitable for him to buy this currency today at the forward rate, even if it is higher than the real market rate, but at the same time protect himself from an even greater increase in the exchange rate of this currency on the day of payment under the contract .

3. In addition to foreign exchange forward transactions, forward transactions with credit and financial instruments are practiced - the so-called "future rate agreements " (forward rate agreements), which are interbank fixed-term agreements on mutual compensation of losses from changes in interest rates on deposits for up to one year (usually in amounts from 1 to 50 million dollars). Forward currency, credit and financial transactions are an alternative to exchange-traded futures and options transactions.

Question 34. Currency futures

1 The concept of currency futures. Differences between currency futures and forward transactions

2. Hedging scheme using futures (example)

1. Currency futures were first used in 1972 at the Chicago Currency Exchange. Currency futures - a forward transaction on the stock exchange, which is the purchase and sale of a certain currency at a rate fixed at the time of the transaction with execution after a certain period.

Differences between currency futures from forward operations are that:

Futures are trading in standard contracts;

A mandatory condition of a futures contract is a security deposit;

Settlements between counterparties are carried out through the clearing house at the foreign exchange exchange, which acts as an intermediary between the parties and at the same time as a guarantor of the transaction.

Advantage futures The advantages of a forward contract are its high liquidity and constant quotation on the foreign exchange exchange. With the help of futures, exporters have the opportunity to hedge their transactions.

2. Hedging scheme using futures Let us consider a foreign exchange transaction using the example of a Russian importer making a payment under a contract in dollars (the price currency is the German mark) to an exporter from the EEC. If the exchange rate of the stamp increases, the Russian importer incurs losses, since to pay for the contract he needs more dollars than he expected to pay when concluding the deal. To insure his currency risk, the importer instructs the broker to enter into two futures contracts on the exchange:

One - for the sale of stamps for the amount of the contract price;

The other is for the purchase of dollars in an amount equal to the contract price, recalculated at the exchange rate of the mark to the dollar at the time of its conclusion. In this case, if the ruble exchange quotations of the dollar and mark in Russia change in accordance with trends in the global foreign exchange market, the risk will be insured. A contract for the sale of stamps will bring a ruble profit in the amount of the increase in the exchange rate of the stamp relative to the dollar in terms of rubles, and a contract for the purchase of dollars will insure the entire transaction against a jump in the ruble exchange rate. The importer can receive additional gains if favorable conditions are created for playing on the difference in the mutual quotation of the mark and the dollar and their cross-rate through the ruble under futures contracts.

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Mazur A.I., Moscow Drama Theater named after A.S. Pushkin

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

We offer foreign trade participants to take advantage of effective mechanisms to protect against exchange rate fluctuations.

You can:

• Fix the exchange rate for any date in the future
• Effectively plan your expenses on foreign exchange contracts
• Insure against losses associated with rising or falling rates

Tools for protection against currency risks

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

• The transaction is carried out at the forward rate
• On the transaction date you do not need to be distracted cash from circulation: all payments will be made on the date you choose

There are two types of currency forwards:

• deliverable (you fix the currency purchase/sale rate)
• settlement (you fix the exchange rate for settlements)

How it works?

Examples of using tools to protect against currency risks

Example: Your company purchases equipment worth $1 million. According to the terms of the contract, you make a 20% advance payment when concluding the contract, the remaining 80% you pay after delivery of the equipment after 3 months. US dollar exchange rate at the time of conclusion of the contract - 60 rubles/dollar

Problem

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

Result: you are protected from exchange rate fluctuations, 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 purchases equipment worth $1 million. Payments will be made in rubles at the exchange rate of the Central Bank of the Russian Federation on the date of payment. According to the terms of the contract, you make a 20% advance payment when concluding the contract, the remaining 80% you pay after delivery of the equipment after 3 months. US dollar exchange rate at the time of conclusion of the contract - 60 rubles/dollar

Problem: you are afraid that the dollar exchange rate 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 after 3 months - 61.8 rubles/dollar

Result: you are protected from exchange rate fluctuations, 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 funds received to make payments under the contract for the purchase of equipment.

Currency option- this is a transaction in which 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 collateral required
• You have the right to refuse to execute a transaction if the fixed rate is unfavorable to you
• For the acquired right, you pay a commission on the day the transaction is concluded

Example: Your company sells petroleum products, and you can plan a schedule for the receipt of foreign currency earnings. In 1 month a large receipt is planned - 5 million US dollars. Exchange rate at the time of conclusion of the contract - 60 rubles/dollar

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

Solution: you enter into a currency option transaction with the right to sell 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 Bank rate.

To use one of the tools for protecting against currency risks or get advice, contact the specialists of Bank St. Petersburg