abhishreshthaa
Abhijeet S
Outright forward quotation:
Some of the major currencies quoted in the forward market are Deutschmarks, Pound sterling, Japanese yen, Swiss franc, Canadian dollar etc. they are generally quoted in terms of US dollars.
Currencies may be quoted in terms of one, three, six months and one year forward. But enterprises may obtain form banks quotations for different periods.
As mentioned earlier, the spot market is for foreign – exchange transactions within two business days. However, some transactions maybe entered into on one day but not completed until after two business days. For example, a French exporter of perfume might sell perfume to an US importer with immediate delivery but payment not required for thirty days.
The US importer is obligated to pay in francs in thirty days and may enter into a contract with a trader to deliver francs in thirty days at a forward rate, a rate today for future delivery.
Thus the forward rate is the rate quoted by foreign – exchange traders for the purchase or sale of foreign exchange in the future.
The difference between the spot and the forward rates is known as either the forward discount or the forward premium on the contract. If the domestic currency is quoted on a direct basis and the forward rate is greater than the spot rate, the foreign currency is selling at a premium. It is calculated as follows:
Forward discount/ premium = Forward mid – Spot mid * 12/n * 100
Spot mid
Where n indicates the number of months forward.
When Fwd rate > Spot rate, it implies premium.
Fwd rate < Spot rate, it implies discount.
In the case of forward market, the arbitrage operates in the differential of interest rates and the premium or discount on exchange rates.
Some of the major currencies quoted in the forward market are Deutschmarks, Pound sterling, Japanese yen, Swiss franc, Canadian dollar etc. they are generally quoted in terms of US dollars.
Currencies may be quoted in terms of one, three, six months and one year forward. But enterprises may obtain form banks quotations for different periods.
As mentioned earlier, the spot market is for foreign – exchange transactions within two business days. However, some transactions maybe entered into on one day but not completed until after two business days. For example, a French exporter of perfume might sell perfume to an US importer with immediate delivery but payment not required for thirty days.
The US importer is obligated to pay in francs in thirty days and may enter into a contract with a trader to deliver francs in thirty days at a forward rate, a rate today for future delivery.
Thus the forward rate is the rate quoted by foreign – exchange traders for the purchase or sale of foreign exchange in the future.
The difference between the spot and the forward rates is known as either the forward discount or the forward premium on the contract. If the domestic currency is quoted on a direct basis and the forward rate is greater than the spot rate, the foreign currency is selling at a premium. It is calculated as follows:
Forward discount/ premium = Forward mid – Spot mid * 12/n * 100
Spot mid
Where n indicates the number of months forward.
When Fwd rate > Spot rate, it implies premium.
Fwd rate < Spot rate, it implies discount.
In the case of forward market, the arbitrage operates in the differential of interest rates and the premium or discount on exchange rates.