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Forward Transactions

Forward Transactions. Agreements to buy/sell currency at some time in the future. The Forward Market. Quotations and Terminology. As before, the spot rate of Swiss francs per dollar is S(SF/$) = 1.1806. The 6-month forward rate of Swiss franc per dollar is F 6 (SF/$) = 1.1665.

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Forward Transactions

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  1. Forward Transactions Agreements to buy/sell currency at some time in the future

  2. The Forward Market

  3. Quotations and Terminology As before, the spot rate of Swiss francs per dollar is S(SF/$) = 1.1806 The 6-month forward rate of Swiss franc per dollar is F6(SF/$) = 1.1665 “F” for forward rate. “6” is for the 6-month contract

  4. Premium (rising value) and Discount (declining value) Forward rates will represent what the market anticipates the currencies will trade for in the future. Because standard contracts are available at different maturities, one can see the anticipated change in currency values. For example, suppose the spot and forward rates are: S(SF/$) = 1.1806; F1(SF/$) =1.1786; F3(SF/$) = 1.1741; F6(SF/$) = 1.1665. The dollar is expected to depreciate relative to the Swiss franc (which is expected to appreciate).

  5. Profit/Loss Diagram for Long and Short Positions U.S. direct quotes are: S($/SF) = 0.8470; F1($/SF) =0.8485; F3($/SF) = 0.8517; F6($/SF) = 0.8573.

  6. Forward Quotes: At Premium/Discount to Spot Just like spot rates, forward rates have bid/ask prices. Example: S($/£) and F($/£) rates HINT: Because the buy/sell difference widens over time, when the first number is larger than the second, they are subtracted. If the first number is smaller than they second, they are added.

  7. Calculating Annualized Discounts/Premia

  8. Swap Transactions

  9. Forward Cross-Rates Just as with spot rates, cross-rates can be calculated for forward transactions using the US$ as an intermediate currency. For example, the 6-month forward rate to buy Thai baht (THB) with Swedish krona (SEK) would be F6(THB/SEK) = F6($/SEK)xF6(THB/$)

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