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Forward fx deals

Cable - A market term used for the British Pound Sterling. Covered Interest Rate Arbitrage - A transaction which consists of borrowing in currency A, in exchange for currency B, investing currency B and covering in the forward market. The transaction takes advantage of interest rate differentials.

Front-to-back processing of a currency transaction

Credit Line - The amount of foreign currency exposure a firm will allow a client to take. Credit Risk - The idea that an outstanding currency position will not be repaid as agreed by the counterparty, either voluntarily or not. Also known as counterparty risk. Cross Rates - Often referred to as the exchange rate between any two currencies not involving the u. In reality, however, all rates are technically cross rates.

Forex transactions

Cost of Carry - The cost of borrowing money in order to maintain a position. It is based on the interest parity which determines the forward price.

Daylight Position Limit - Position limits on a currency or aggregate on a series of currencies that a trader can carry during regular trading hours. Direct Dealing - An approach whereby dealers contact each other to transact without a broker. Discount Forward Spread - The forward points that is subtracted from the spot to arrive at the forward price.

This means that the foreign interest rate is lower than the u. Also known as swap points. Exotic Currency - A currency with little liquidity and limited dealing, which is neither a major or minor currency. Forward Outright - A foreign exchange deal with a maturity beyond the spot delivery date. Forward Spread - Refers to the forward premium or discount that the forward price trades at. The forward price is calculated with the spot price, interest rate differential, and days to delivery. Initial Margin - The margin paid initially to trade currency futures or margined otc forex.

Interest Rate - Interest rates may be determined by a simple rule using the bid and offer spread on an fx rate. If the rate quoted is in european terms and the offered price is higher than the bid, then you know that the interest rate is that nation is higher than the rate in the base nation for the particular time in question. If quoted in american terms, the opposite is true. Kiwi - A market term for the New Zealand Dollar. Libor - London Interbank Offered Rate. This is the rate at which banks will lend to each other, set at a.

London time. Major Currency - The euro, d-mark, swiss franc, british pound, and japanese yen. Market Maker - One that consistently makes two way prices, providing both a bid and an offer.

Forwards | Forex Training Tips | easyMarkets

Unlike brokers, market makers trade their capital, although they will hedge. Mark-to-Market - A system by which futures contracts and other markets are revalued using closing market prices to determine cash flow requirements for margin purposes. Matching Systems - An electronic system that attempts to duplicate the brokers market. These entail all transactions involving the exchange of two currencies.

The world currency market is extremely active: demand fuelled by importers and exporters is picked up and amplified by speculation. This is an over-the-counter market directed by banks and brokers. Market participants always quote currencies in price intervals: The lower price figure represents the trader's buy price: in other words, the bid price, while the higher figure is the sell or ask price.

In light of the fact that all market players are familiar with the current price and that it changes too fast, only the last two figures are quoted. These are called pips.

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Pips are the last figure after the decimal point in a quote. Ccy1 is thus the traded currency and Ccy2 the price currency. The way of expressing the rate is a convention relating to the relative trading priority of currencies. A "direct quote" expresses the quantity of the other currency that you will receive for one unit of the base currency. The euro quotes directly against all other currencies. The US dollar quotes directly against all other currencies… except the euro.

Rates are posted on the market for the most actively traded currencies: the euro and dollar rates are listed daily on a continuous basis against other currencies. For currency pairs typically not listed on the market, the trade goes through an intermediary of one of the two currencies in order to obtain a cross rate. Forward or outright currency trading entails a swap between two currencies at a negotiated date value date and exchange rate.

This type of contract enables traders to set an exchange rate between two currencies in the future and thus hedge against currency risk. The characteristics of a forward currency transaction are defined in relation to a benchmark spot rate for the day's trading.

When the forward rate is above the spot rate, the currency is said to be in contango; when the spot rate is above the forward rate, it is in backwardation. But how is a forward rate determined? Forward rates are not listed on the market. These are the rates that are used to calculate forward rates.

From the viewpoint of the trader quoting the transaction, the forward currency transaction entails three operations:.

Currency Forward Definition

The graph below illustrates the logic of a forward purchase of currency C1 for C2. Bear in mind that the dotted lines do not represent real cash flows but are only used to illustrate transaction logic. Only the cash flows at value date lines are the real cash flows of the transaction. He would have to lend amount A' 1 today for the payback from the imaginary loan of C 1 to equal this amount A 1 :.

Likewise, Amount A 2 at maturity date corresponds to a borrowed amount today A' 2 such that:. This is a bit complicated but once the formula is input into the Excel program, we don't have to think about it anymore! This means that the forward price is not an anticipated future spot rate, despite what we might think. It is nonetheless based on a currency evaluation via market rates. The contango or backwardation, defined above, depend on the level of currency interest rates.

When the forward exchange rate is such that a forward trade costs more than a spot trade today costs, there is said to be a forward premium.

12 Annualized forward premium and discount on a currency

If the reverse were true, such that the forward trade were cheaper than a spot trade then there would be a forward discount. A forex swap consists of two legs: a spot foreign exchange transaction, and a forward foreign exchange transaction. These two legs are executed simultaneously for the same quantity, and therefore offset each other. A forex swap enables an investor to obtain currencies immediately and then sell them at a price agreed upon in the contract at swap maturity date. For example, a client possessing money denominated in euros wishing to investment in US 3-month T-bills buys dollars today to pay for the purchase.

He then sells them at maturity at a known price. Comment: In comparison with a forward currency contract, the monies exchanged involve the money actually loaned by the trader and bought on a forward basis and the actual borrowing of the sold currency. The forward rate is calculated in the same way. The far leg has the characteristics of a forward contract which are deduced from the spot exchange:.

Forward extra

The forex market is an OTC market, driven by banks and brokers. Trades can be made in conversation mode: traders literally talk online before making deals. Otherwise the platforms match up the proposals made by participants: as such, it is the system that makes the deals and counterparties only learn each other's identity once the trade is concluded. The Front office system records the deals in real time. Deals negotiated by telephone are registered by the trader while those made via electronic platforms are transmitted automatically.


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The graph below illustrates the information flow between two banks and their correspondent banks when Bank A sells Currency 1 in exchange for Currency 2 from Bank B:. Table of contents. All Fimarkets content. Financial Market Actors. Financial market actors.