Features of Forward Exchange Contract

Exchange rate is not always stable, it keeps on changing every three seconds, therefore by the time exporter or importer has executed the contract and realized his bill, exchange rate might have turn adverse for him bringing unexpected losses to him.

To overcome this risk forward contract can be used, which is defined as a contract which is entered by two parties for purchase or sale of foreign currency at an agreed rate at a future date. The rate specified in forward contract is called forward rate. Here are some of the features of forward exchange contract –

1. Forward rate for a currency is not equal to spot rate, it may at premium that is higher or at discount that is lower than spot rate.

2. The premium and discount on forward rate in a free market will be equal to the differences between interest rates in the two currencies.

3. A forward contract has no secondary market, it is written over the counter to suit the specific exposure requirement of the clients of the banks.

4. Apart from demand and supply of currency there are other factors like sudden movements in capital, activities of speculators, intervention by the central banks in foreign exchange market which influences the forward rates.

5. Forward exchange contracts can either be fixed forward contract or option forward contract. Under fixed contract the transactions will have to be completed on the specified forward date, while under option contract the transactions will have to be completed within a specified period and not on specified date which cannot exceed one calendar month.

0 comments… add one

Leave a Comment

Related pages

the disadvantages of globalizationwhy is deflation a problemunqualified auditadvantages and disadvantages of working capitalstatutory liquidity ratio slrstatutory liquidity ratio in hindiassumptions of capm explainedjournal entry for bills receivablecurrent liabilities examples balance sheetfictitious asset meaningsocialism mixed economydefine complimentary goodsventure capitalist advantagesfund flow cash flowfeature of capitalismadvantages and disadvantages of social media marketingexample of indirect quotationnasdaq full formkyc abbreviationmonopolistic characteristicsmerits of market economywhat is a normal good and an inferior goodadvantage and disadvantage of joint venturecharacteristics of a planned economyconglomerate corporationexample of penetration pricingadvantages and disadvantages of socialist economyregular payback periodfree market economy advantages and disadvantagesrevenue received in advance journal entryprocess costing advantages and disadvantagesunearned revenue accountingadvantage and disadvantage of international tradeunbilled revenue journal entryoperating lease and finance lease differencemixed economy tagalogunqualified audit opinion definitionadvantages of a centrally planned economybills discounting meaningadjusting entries for interestdisadvantages of a bank loanexamples of cash inflowsunqualified audit reportdifference between hire purchase and installmentdifference between tariff and taxhow to calculate national income by expenditure methodadvantages of command economyaccounting entry for prepaid insurancejournal entry for bad debtswhat are fictitious assetsmoney market hedge advantages disadvantagessystematic risk and unsystematic risk pdfexplicit cost in economicsmeaning of capital formationpayback method disadvantagesadvantages and disadvantages of secured loanslimitation of financial accountingadvantages and disadvantages of working capitalwhat is idle time in cost accountingdefine floating exchange rateunearned rent revenue balance sheetweakness of socialismadvantages of capitalismcapital account journal entrydifference between consignor and consigneehorizontal and vertical analysis of a financial statementpricing strategies gcseadvantages of monopolistic competitionexample of capital reservecheque examplesbond ladder strategycredit sales journal entryadvantages and disadvantages of job analysisconsignor meaningjournal entry for outstanding expensesmeaning of fluctuate in hindimonopoly tutor2umerger and acquisition advantagesadvantages of payback period methodan example of diminishing marginal utilitydistinguish between explicit and implicit cost