Printer Friendly| Fixed Forward FX Contracts | Option Forward FX Contracts |
| Close out of Forward Contracts | FX Contract Rollover/Extension |
| Swapping Maturing Dates | Interest Rates – Premium & Discounts |
Interest rates are a reflection of the state of a country's economy and level of inflation. They are linked to the strengths and weaknesses of an individual currency in the long term.
This means that
strong currencies with low interest rates will be sold at a higher forward
exchange rate or premium. A currency with a high interest rate will be sold at
a discount or lower forward exchange rate.
For example, assume
that the interest rate of the US Dollar is 10% pa while that of the Japanese
Yen is 5% pa.
If selling US
Dollars and buying Japanese Yen, the one-year forward US Dollar/Yen exchange
rate would have a 5% premium on the Yen Spot Rate. That is to say that it would cost 5% more in US
Dollar terms to protect the buyer of Yen from the risk of adverse currency
fluctuation.
It can be considered
as the premium cost of insuring the risk.
The following are
some examples of how the Forward FX market can be used to hedge risk and to
assist in commercial decisions.
(The exchange rates
and interest rates used are not necessarily based on the current market levels)
If you are importing or exporting, for expert commercial foreign exchange services, speak to us at Raphael's Bank.
Quick and easy foreign exchange deals via our branch network, treasury centres or over the Internet.
More information.