Fixed Date Forward FX Contracts

The Delivery Date of a Forward Contract ranges from three days to more than five years from the FX Contract date, depending on requirements and depth of market.
 
In practice, the delivery dates of the vast volume of forward contracts are for between seven days and one year ahead. 

Forward contracts are a very suitable method of providing a perfect hedge for transaction exposures, since they can be written for most currencies in most amounts for delivery at most future dates, and taken out exactly to match the position of the original exposure.
Foreign exchange for immediate delivery (within 2-days) is purchase and sold on the Spot Market.  

Forward Markets fix future exchange rates today and are used by:

• companies wishing to protect themselves against the risk of adverse exchange rate movement
  

• arbitrageurs wishing to profit from differences in the interest rates between countries, and

• speculators who use the forward market to buy foreign exchange in the expectation of favourable FX rate movements
  

Forward Rates

The Forward FX rate is usually different from the Spot FX rate for the same currency, but not always.
 

The difference between the Forward and Spot FX rates is called either the 'Premium' or 'Discount' of the Forward rate over the Spot rate. When they are the same rate they are at 'Par'.
 

Forward rates are always quoted against the Spot Rate, i.e. by an amount that has to be added to or deducted from the Spot Rate. This amount (margin) represents the obtainable interest rate differential between the two (freely convertible) currencies for borrowing and depositing currency for the forward period required.
 

The Forward rate is not a prediction of future exchange rates. It is calculated using interest rate differentials between the two currencies involved, expressed as a forward premium (deducted from the current Spot FX Rate) or a forward discount (added to the current Spot FX Rate) as follows:
 

Spot x   interest rate differential x period in days

360 x 100

Note that the year is calculated as 360 days not 365 days.

There are only three possible rates ways of expressing Forward FX rates against the Spot Rate:-

• At "PAR" when the margin is nil. Here there is nothing to add to or subtract from the Spot Rate.  If the bank advises an   exporting customer that it buys Euros Spot at EUR1.6435/£1   three months forward at "par", and then the three months' rate is also EUR1.6435/£1.