Forward transactions: what is it and “what do they eat with”

Forward operations (forward operation or abbreviated fwd ) are currency exchange transactions at a pre-agreed rate that are concluded today, but the value date is postponed for a certain period in the future. In this case, the currency, amount, exchange rate and payment date are fixed at the time of the transaction. The term of forward transactions ranges from 3 days to 5 years, but the most common dates are 1, 3, 6 and 12 months from the date of the transaction.

The forward contract is bank contract, so it is not standardized and can be tailored to a specific operation. The market for forward transactions with a term of up to 6 months in major currencies is quite stable, for a term of more than 6 months it is unstable, while individual transactions can cause large fluctuations in exchange rates.

The forward rate is the sum of the spot rate at the time of the transaction and the premium or discount, i.e. surcharges or discounts depending on the interest rates of the interbank market for a given period.

The forward rate is usually different from the spot rate and is determined by the interest rate differential between the two currencies. The forward rate is not a prediction of the future spot rate. If the execution of a forward contract occurs before 1 month, then it is considered concluded for short dates.

Forward operations are used in the following cases:

· hedging (insurance) of currency risks;

· speculative transactions.

Hedgerstry to reduce the risk of changes in the future price or interest rate by entering into forward contracts that guarantee the future exchange rate. Hedging does not increase or decrease the expected returns of a market participant, but only changes the risk profile. The principle of hedging is that the movement of the exchange rates of the currency market is compensated by an equal and opposite movement of the price of the hedging instrument.

The Bank may insure the risks of its customers. For example, foreign trade organizations that have payments and receipts in different currencies, using forward contracts, are also able to insure the risk of changes in exchange rates. If a company knows the schedule of sales and purchases well, it can hedge the risk of a possible change in the exchange rate in an unfavorable direction, while knowing the exchange rate in advance, the company is able to calculate its future costs and outline the correct investment and pricing policy. The forward contracts market is much more popular abroad than in Russia.

Suppose that an American importer of German cars has to pay for the delivery in EURO, while selling cars in dollars. In this case, the importer needs to negotiate with the German manufacturer the cost of delivery in EURO and calculate the selling price in US dollars. The importer's risk lies in the fact that in the time interval between the moment of concluding a contract in EURO and the actual sale of goods in US dollars, the dollar exchange rate may fall. As a result of the depreciation, the importer will need a larger amount in US dollars to recover contract costs incurred in EURO. However, when concluding a forward contract, the importer will know the exact amount in US dollars required to convert into EURO under the contract, as well as the selling price of the imported goods, taking into account the guaranteed profit.

If, for speculative purposes, the dealer buys EURO for US dollars for a period of a month at the exchange rate EUR/USD 0.9926, and in a month the spot rate will be equal to EUR/USD 0.9960, then this operation will bring profit to the bank. For example, a foreign exchange dealer buys EUR 10 million at the forward rate EUR/USD 0.9926 for a period of 1 month for the purpose of speculating on the exchange rate. One month later, on the value date, the bank will receive EUR 10 million and pay USD 9.926.000.

If, on the value date, the spot rate in the market is EUR/USD 0.9960, then the dealer will sell EUR 10 million for dollars and receive USD 9.960.000. As can be seen from this example, as a result of the operation, the bank's profit amounted to USD 34.000 as a result of the fact that the dealer considered that the quoted forward rate EUR/USD presumably better than the future spot rate on the value date of the forward contract. However, if the spot rate is EUR/USD 0.9908, then the sale of EURO will result in a loss. Opening currency positions in the forward market is also associated with risk, as in the case of other speculative transactions.

Forward Outright Rate = Spot Rate ± forward points

Forward outright rate = spot rate ± forward points

Forward points are also called swap points, forward difference or swap difference.

If the forward rate is greater than the spot rate ( FR > SR ), then the currency is quoted “at a premium” if FR< SR , then the currency is quoted "at a discount".

Amount of forward discounts or premiums by currency

FD (P m ; Dis) = ,

where FD (P m ; Dis ) – forward differential (premium or discount);

FR – forward rate;

SR - spot rate;

t – term (in days) of the forward contract.

Currency premiums and discounts are recalculated on an annual basis so that the return on investing foreign currency in a forward transaction can be compared with the return on investing in money market instruments.

Daily international financial publications type The W a ll Street Journal and Financial Times print the current spot rates ( spot rates ) and forward rates ( forward rates ) for 30, 90 and 180 days, this information is also provided by the agency Reuters.

In the forward market, banks also quote the buying and selling rates of currencies and calculate the cross rate accordingly. At the same time, the margin between the currency buying rate and the currency selling rate ( AFR-BFR ) is higher for forward transactions and amounts to 0.125-0.25% per annum, while at the spot rate it is 0.08-0.1% per annum.

Forward points are absolute points of a given exchange rate (in units of the quote currency), by which the spot rate is adjusted when conducting forward transactions, and reflect the difference in interest rates for specific periods between currencies sold on international money markets - the percentage differential.

There are two main methods for quoting the forward rate: outright and method swap rates.

When quoting by the outright method, banks indicate for clients both the full spot rate and the full forward rate, as well as the time and amount of currency delivery.

In most cases in the interbank market, the forward rate is quoted using swap rates. This is due to the fact that dealers operate on forward margins (ie discounts or premiums) expressed in points, which are called swap rates or swap rates. Forward margins have become popular for the following reasons:

· they most often remain unchanged, while spot rates are subject to large fluctuations; thus, fewer changes need to be made to the quotation of premiums and discounts;

· in many trades, it is the forward margin that needs to be known, not the full forward rate.

There is a rule that:

· a currency with a low interest rate for a certain period is quoted on a forward basis against a currency with a high interest rate for the same period with a premium;

· a currency with a high interest rate for a certain period is quoted on a forward basis against a currency with a low interest rate for the same period at a discount, or discount.

The main reason for the difference between the spot and forward rates is the difference in interest rates on deposits of the two currencies. Assume that the forward rate and the spot rate of the US dollar against the Japanese yen are USD/JPY 125.0000. Interest rates on dollar deposits are 10%, while the bank rate on yen is only 4% per annum. Then investors would buy US dollars and place them in dollar deposits with a higher yield. At the end of the term, investors would be able to convert US dollars back into Japanese yens. At the same time, the received income from the operation would have increased the amount of possible income from placing a deposit in yen at a rate of 4% per annum.

Thus, if we assume that the spot and forward rates are equal, then by calculating the return on deposits in dollars and yen, investors would conclude 2 contracts at the same time:

1. buying US dollars on the spot at the rate of 125.0000

JPY 125.0000 = USD 1.0000

2. forward contract (outright deal) for the sale of dollars (that is, buying back yen) at the same rate of 125.0000 on the day the deposit ends in the amount of the deposit and accrued interest:

USD 1008.33 00 = JPY 126.041 0

At the same time, the amount from the placement JPY 125.000 in deposit at 4% would amount to only JPY 125.417.

If in practice the equality of rates was observed, then investors would rush to convert currencies and place deposits with a higher yield, as a result of which the exchange rate for this currency would instantly collapse, or interest rates on deposits in another currency would fall. Theoretically, the forward rate is equal to the spot rate only if interest rates in currencies for a given period are equal.

In the example above, the forward rate must actually be higher than the spot rate by some amount to offset the difference in interest rates when a forward conversion is made in the future.

There is a rule that:

· a currency with a low interest rate for a certain period is quoted on a forward basis against a currency with a high interest rate for the same period with a premium.

· a currency with a high interest rate for a certain period is quoted on a forward basis against a currency with a low interest rate for the same period with discount or discount.

To obtain a forward rate based on the current exchange rate, you must add or subtract forward points from the spot rate. Actions are defined according to the scheme shown in Table 8.

Table 8

Forward

points

Base currency

traded

forward rate

equals

Higher value

Goes first

High/Low

with a discount

spot rate minus

forward points

lower value

Goes first

Low/high

with a premium

spot rate plus

forward points

Thus, the forward rate is calculated by adding the premium or subtracting the discount from the current spot rate. Traders use two formulas to calculate forward points. Formula 1 gives more accurate results. Formula 2 gives a less accurate result, but makes the calculation simpler.

Formula 1

Forward spot ratex(% currency - % base currency) xnumber of days

points = (% base currency x number of days) + 360 x 100

Formula 2

Forward spot ratexinterest rate differential xnumber of days

Points = 100 x 360

Here, the interest rates for currencies will refer to the period (number of days) for which the forward rate is calculated.

Instead of 360 days, accepted for most currencies as an interest base, for pounds sterling, rubles, Canadian, Singaporean dollars, 365/366 days must be taken into account.

If the forward points received are positive, they represent a premium and will be added to the spot rate; in the case of a negative sign, they will be a discount and deducted from the spot rate.

Forward points can always be determined from the known interest rates of the currencies involved. Formulas 1 and 2 are applicable for any currency pairs, including pairs with cross rates.

Using these formulas, you can calculate the average forward points for the average outright rate (without taking into account the sides bid and offer ). However, both the spot rate and the outright rate are quoted by banks as a double quotation. Forward points are also calculated as bid and offer :

Formula 3

Forward spotbid x(% currencybid- % baseoffer) xnumber of days

bid points = offer x number of days)

Formula 4

Forward spotofferx(% currencyoffer- % basebid) xnumber of days

offer points = 360 x 100 + (% base currency bid x number of days)

Example of calculating 3-month forward points bid and offer for the US dollar to EURO exchange rate.

EUR/USD quote 1.0531 - 1.0536, or 31/36.

The 3-month rates for deposits in US dollars and EURO are (Table 9):

Table 9

		OFFER

0.0026

Forward 1.0531 x (5 - 4)* x_ 90 days

bid points = 360 x 100 + (4 x 90)

0.0078

Forward 1.0536 x (6 - 3)* x_ 90 days

offer points = 360 x 100 + (3 x 90)

The quote for forward points provided by the bank dealer would be as follows:

BID OFFER

EUR/USD sprat rate 1.0531 1.0536

3 months forward. n-you 26 78

3-month course outright 1.05 57 1.0 614

* the meaning of this action is to calculate the cost of lost opportunity, that is, by concluding a deal, the dealer loses the opportunity to deposit the same funds

To find the forward outright rate, the dealer added forward points and spot quotes, respectively, on the sides bid and offer. By the side of the bid , just as with spot rates, a bank that quotes a forward outright rate will buy the base currency (in this case EURO) against US dollars on a future delivery basis. By side offer the bank will sell the base currency on a forward basis. Calculations carried out by bank dealers are made automatically using special software according to the algorithms given above.

The amount of margin (spread) between the party bid and offer side when quoting forward points and the rate, the outright depends on the same factors as when quoting the spot rate, i.e. the nature of the counterparty, the market situation, the size of the amount, etc.

For a foreign exchange dealer operating on international markets, Reuters provides information on the current forward pip rates for standard terms. If a dealer of one bank requests a forward quote from another bank, that bank will quote him forward points, for example, 26/78 or 199/198. Quoting forward points is much more convenient, as they depend on percentage differentials and change less frequently than spot rates.

For ease of finding the forward rate, dealers use the following rule:

· if forward points increase from left to right (quote bid less quotes offer ) - then to find the outright rate, forward points are added to the spot rate;

· if forward points decrease from left to right (side bid more side offer ), then forward points are subtracted from the spot rate to find the outright rate.

In the Reuters information pages, forward points that decrease from left to right are additionally provided with a negative sign for convenience of perception, indicating that they must be subtracted from the spot rate to obtain a forward rate.

For example, a foreign exchange dealer needs to quote a 6-month outright rate of the pound sterling against the US dollar. Since the interest rates for the pound sterling are higher than for the US dollars, the pound will be quoted at a discount against the dollar (or you could say that the dollar will be quoted at a premium against the pound). The dealer uses the Reuters page FWDW , where for a period of 6 months (6M) finds the following quote of 6-month forward points: -199/-198. Current spot rate GBP/USD is 1.5603/13. Since forward points decrease from left to right, they must be subtracted from the spot rate:

GBP/USD spot 1.5603 / 1.5613

6 mth fwd points - 199 - 198

6mth GBP/USD outright 1.5404 1.5415

Sometimes forward points in the same two-way quote are both subtracted and added: - 1.0/+1.0, which means "around parity" ( round par .). This happens with very small interest rate differentials. So, on the screen you can see the quote -1.0/+1.0. In this case, the trader says: "One from parity." Parity is zero. Quote – 3.0/+3.0 is read as “three from parity”. There is also a quote par /3 or 3/par . Similar arithmetic operations are applied to quotes to obtain a forward rate.

Forward points for broken dates ( broken dates ) can be calculated according to the formula and also taken from the pages of the Reuters agency in the form of ready-made forward points. Dealers entering into a broken date forward should be aware that the market for such transactions is less liquid than the market for transactions with standard terms, and it may be difficult to find a counterparty for it to close.

Assume that the forward points for standard periods with forward dates are:

2 months 31 – 47

3 months 55 – 74

The difference between forward points for 2 and 3 months is:

For the bid side 55 – 31 = 24

For the offer side 74 - 47 = 27

For one day, the forward points of the 2nd month (the period between the 2nd and 3rd month) are respectively:

For the bid side 24/30 = 0.8

For the offer side 27/30 = 0.9

For 10 days of the second month forward points will be:

bid offer

0.8 x 10 = 8 0.9 x 10 = 9

The required forward points for a period of 2 months and 10 days will be:

31 4 7

+8 +9

39 – 5 6

Swap rates, which are quoted in banking information systems, are given only for full months or for so-called direct dates. If the spot value date coincides with the last day of the month, then the “end of month” rule applies, in which all forward transactions at such a spot rate have a value date on the last day of the month. For example, if a 6-month forward trade is entered into on February 26, then the corresponding spot date would be February 28, i.e. the end of the month. Therefore, this forward trade should be paid on August 31st and not August 28th. All other dates that do not follow the "end of the month" rule are called broken dates. In this case, swap points are calculated by converting the difference in swap points for two direct dates into a daily rate.

The positive aspects of forward transactions include the fact that they provide great room for maneuver, especially if the forward transaction is not directed against specific assets or liabilities. While spot transactions must be settled almost immediately, simple forward contracts allow time for liquidity controls and adjustments.

The forward market is also important for financial managers of companies, as they can determine the value of imports or exports in local currency long before the due date. When a financial manager enters into a fixed-term contract with a bank, his main task is not to be left with an open currency position if, for some reason, the goods or payment are not received. Professional dealers, having unlimited market information, have more room for maneuver than their commercial counterparts. However, there are also significant risks associated with futures transactions. The longer the term of the forward contract, the greater the risk that the counterparty's creditworthiness may deteriorate. The probability of cancellation of a spot contract is much lower than that of a forward contract. At the same time, the most “unsuccessful” option is one in which one of the parties fulfills the terms of the transaction, while the other does not. This can result in the loss of a significant amount or a costly lawsuit.

In Russia, the forward market is much less developed than the spot market, which is explained by the market's predominant orientation towards short-term transactions.

Exchange futures currency transactions include options and futures contracts. However, commercial banks are now also trading option contracts, and such trading is especially widespread in Switzerland.

Forward operations(forward operation or abbreviated - fwd) - these are currency exchange transactions at a pre-agreed rate, which are concluded today, but the value date is postponed for a certain period in the future. In this case, the currency, amount, exchange rate and payment date are fixed at the time of the transaction. The term of forward transactions ranges from 3 days to 5 years, but the most common dates are 1, 3, 6 and 12 months from the date of the transaction.

The forward contract is bank contract, therefore, it is not standardized and can be tailored to a specific operation. The market for forward transactions with a term of up to 6 months in major currencies is quite stable, for a term of more than 6 months it is unstable, while individual transactions can cause strong fluctuations in exchange rates.

Forward operations are used in the following cases:

Hedging (insurance) of currency risks;

Speculative transactions.

Hedgers try to reduce the risk of changes in the future price or interest rate by entering into forward contracts that guarantee the future exchange rate. Hedging does not increase or decrease the expected returns of a market participant, but only changes the risk profile. The principle of hedging is that the movement of the exchange rates of the currency market is compensated by an equal and opposite movement of the price of the hedging instrument.

If, for speculative purposes, the dealer buys EURO for US dollars for a month at the rate of EUR / USD 0.9926, and in a month the spot rate is equal to EUR / USD 0.9960, then this operation will bring profit to the bank. For example, a foreign exchange dealer buys EUR 10 million at a forward rate of EUR/USD 0.9926 for a period of 1 month in order to speculate on the exchange rate. A month later, on the value date, the bank will receive EUR 10 million and pay USD 9.926.000.

If on the value date the spot market rate is EUR / USD 0.9960, then the dealer will sell EUR 10 million for dollars and receive USD 9.960.000. As you can see from this example, the transaction resulted in a bank profit of USD 34,000 as a result of the dealer deeming that the quoted EUR/USD forward rate is presumably better than the future spot rate on the value date of the forward contract. However, if the spot rate is EUR / USD 0.9908, then selling EURO will result in a loss. Opening currency positions in the forward market is also associated with risk, as in the case of other speculative transactions.

Forward outright rate = spot rate ± forward points Forward outright rate = spot rate ± forward points

Forward points are also called swap points, forward difference or swap difference.

If the forward rate is greater than the spot rate (FR > SR), then the currency is quoted at a premium, if FR< SR , то валюта котируется с дисконтом.

forward contract- a certain agreement concluded between the two parties on the forthcoming delivery of the underlying asset.

The existing terms of the contract are negotiated at the time of its conclusion. A forward contract is executed on the basis of these conditions and on time.

What are the features of a forward contract?

The conclusion of a forward contract does not provide for any costs, with the exception of those commissions that will be spent on processing the transaction, if it is carried out with the help of an intermediary.

Is forward contract, usually for the purpose of buying or selling a required asset, in addition to insuring a supplier or some buyer against a potentially unwanted price change. Counterparties, on the other hand, are insured against undesirable developments, not being able to take advantage of a potentially favorable market situation.

The terms of the forward contract stipulate the obligation to perform, but despite this, the counterparties are still not 100% insured against its non-performance. For example, due to the bad faith of any of the participants in the transaction or the bankruptcy of the company. Therefore, before concluding a deal, you need to make sure that both parties are solvent and reputable.

Also, a forward contract can be concluded, in which the goal is to play on the difference in the value of the asset rate. A buying analyst expects the price of the underlying asset to rise, and a selling analyst expects the asset price to fall.

For its primary purpose, a forward contract is considered an individual type of contract. For this reason, other markets for forward contracts for a large share of assets are poorly developed or not developed at all. An exception here may be forward.

When signing a forward contract, both parties agree on the price of the transaction. This price is called the delivery price, after which it remains constant throughout the duration of this forward contract.

With the advent of the forward contract, the concept of a certain forward price appeared. Relative to each time interval, the forward price, for the current underlying asset, is the delivery price noted in the contract signed to date.

Legal features and types of forward contracts

Let us examine in more detail the legal features of forward contracts. As we have already said, the forward type of contract involves the real delivery of any product as the final result. Since the object of the forward is the real product, that is, the things that are available. With all this, the reference to the validity of the goods should in no way infringe on the right of the seller to conclude a contract for the sale of goods that will be manufactured or purchased by the person selling the goods in the future.

A forward contract is enforced some time later, after its direct conclusion.

A forward is a justified opportunity to insure profits.

Before concluding such an agreement, its important conditions are stipulated, namely:

terms
total quantity of goods
its price, which is not completed before a specific delivery date.

This type of risk insurance is called hedging in the market. The base price of a commodity in all forward transactions is different from its price in cash transactions. In addition, it can be set both at the time of signing the contract, and during the calculation and delivery.

The execution cost of a forward transaction (which is determined for the period of its implementation) is some average exchange price indicator for this product.

The forward price is the result of the participants' assessment of all possible factors influencing the market, and all further prospects for the development of related events on it.

Price ratio in forward contracts

In the process of development of the foreign exchange market, forward contracts began to be divided according to the method of delivery into the following types:

delivery type of forward contracts;
further, settlement forward contracts, in other words, non-deliverable types of forward contracts.

As for supply contracts, the delivery under them is calculated initially, and mutual settlement is made by paying one of the parties the resulting difference in the cost of the goods or a previously established amount, based on the terms of the contract.

When working with settlement types of contracts, the delivery of goods (ie the underlying asset) is not provided from the beginning of the transaction. Such contracts allow the losing party to pay a set amount of money, the difference between the price itself, stipulated in the contract and the current market price on a specific date.

The calculation for this amount (also called the variation margin) is made at a previously appointed time, as a rule, in relation to the delivery of the basis.

Determining the forward price

Based on the theory, in the process of determining the forward price, 2 concepts are usually distinguished:

The first is that the forward price arises as a result of the upcoming expectations of all participants in the futures exchange, in relation to the upcoming spot price.

The second type of concept is based on the arbitrage method. According to the provisions of the primary concept, all participants in economic relations are trying to take into account and consider all the information that they have in relation to the upcoming conjuncture and set the price of the future spot.

An arbitrage approach is built on the basis of technical mutual agreement between the current spot and forward prices, which is set without any possible risk.

The arbitrage approach is based on the following provision: on the basis of a financial decision, the investor is obliged to be indifferent in the matter of obtaining the underlying asset in the spot market now or under a forward contract in the future.

During the life of the forward contract, income on shares will either be paid or not.

If a profit is accrued per share during the validity of the contract, then the forward price must be changed by its value, because by signing the contract, the investor will not receive his dividends. Moreover, there is a definition of the forward price of the currency itself, based on the parity of % rates, which consists in the fact that the depositor is obliged to receive an equal income from the placement of funds at a certain percentage without significant risk in foreign, and necessarily.

Forward contract and mutual obligations

Forward contract - a contract with the help of which a forward currency transaction is executed. Under this transaction, one party (the seller) undertakes to sell to the other (the buyer) a certain amount of foreign currency at a certain point in the future at a price fixed at the time of the conclusion of this transaction (Fig. 18.1). The day on which the transaction will be settled is called the value date, and the price fixed in the forward contract is called the delivery price.
Forward transactions are concluded, as a rule, in the over-the-counter market. At the same time, the parties agree among themselves all the essential terms of the transaction: the amount of the base currency, the term and method of its delivery, the price of delivery. Such conditions for concluding a forward contract make it unique, which significantly reduces its further liquidity. When concluding a contract, the parties do not bear any financial costs, except in cases where transactions are concluded with the help of intermediaries.
Conclusion
Forward Delivery
currency contract

Delivery of rubles
a) Transaction date b) Value date

Concluding a forward transaction, its parties open their currency positions: the seller - short, the buyer - long. You can close a position by entering into a counter-trade.
In most cases, forward contracts are entered into for the purpose of insurance against foreign exchange risk associated with an unfavorable change in the exchange rate of the base currency in the future. At the same time, the seller, who under the contract is, as a rule, the owner of the base currency, is insured against a fall in its exchange rate, and the buyer, who is interested in receiving real currency, is insured against its growth. However, a forward contract can also be used for speculative purposes, when the goal is to play on changes in exchange rates over time. In this case, it is more appropriate to enter into settlement forward contracts.
Estimated forwards. Settlement forward contract is a contract with the help of which a conversion operation is executed, which is a combination of two transactions: a transaction under a currency forward contract and the fulfillment of obligations to conduct an opposite transaction on the date of its value at the current exchange rate. In practice, this is a forward contract, under which there is no delivery of the base currency, i.e. the seller sells and the buyer buys this currency conditionally. How are payments under this contract made?
As mentioned above, a settlement forward contract is concluded if the parties involved in it pursue purely speculative purposes. Therefore, they are only interested in making a profit, which is transferred by the loser.
winning side. The winning and losing parties are determined according to the following rule: if the current exchange rate of the base currency on the settlement day of the forward contract exceeds the delivery price of this currency under the contract, then the difference between these rates, multiplied by the amount of the contract, is paid by the seller under the contract, and vice versa. This rule is based on the following reasoning: if the forward contract were staged, then in order to deliver the currency at it, the seller would have to buy it at the current rate, and if this rate was higher than the delivery price under the contract, then he would would suffer the most losses. The buyer in this case, having received the currency at the delivery price, could sell it at the current rate and thereby make a profit.

Therefore, when concluding a settlement foreign exchange forward contract, the seller on it counts on a depreciation of the base currency, and the buyer - on its growth.

This type of conversion operations was widely developed in Russia until August 1995, when, due to the introduction of the currency corridor, the volatility (fluctuation) of the exchange rate, which had been observed before, sharply decreased. At that time, the base currency was most often the US dollar, and its current rate was the rate set at the auctions on the MICEX. The active use of settlement forwards was due to two reasons:
speculative prevailing in the market;
legislative restrictions (for banks - the lack of a foreign exchange license), due to which many did not have the right to enter into deliverable foreign exchange forward contracts.
Currently, when concluding an estimated foreign exchange forward, either the exchange rate fixed at auctions in SELT or the official exchange rate set by the Central Bank of the Russian Federation can be used as the current rate.
Let us consider the procedure for carrying out settlement currency forward transactions using the following conditional example: on September 10, 1999, bank A and bank B enter into a settlement forward contract, according to which bank A undertakes on December 1, 1999 to conditionally sell to bank B 100,000 US dollars at exchange rate of 26.25 rubles/dollars. Settlements between banks under this contract are made according to the above-described rule. In quality-
The current exchange rate is based on the official US dollar exchange rate set by the Central Bank of the Russian Federation.
Let us consider the procedure for performing operations on settlement currency forwards using the following conditional example: on September 10, 1999, bank A and bank B enter into a settlement forward contract between themselves, according to which bank A undertakes on December 1, 1999 to conditionally sell to bank B 100,000 US dollars at exchange rate of 26.25 rubles / USD. Settlements between banks under this contract are made according to the rule described above. The official US dollar exchange rate set by the Central Bank of the Russian Federation is used as the current exchange rate.
On December 1, 1999, the Central Bank of the Russian Federation sets the official exchange rate for the US dollar at the level of 26.53 rubles. dollars. Since the current exchange rate is higher than the delivery price under the contract, the losing party is bank A. It transfers money to bank B in the amount of 26.53 - 26.25 rubles. dollars 100,000 = 28,000 rubles, which are the profit of the latter under this contract.
Currency futures. Futures contract - an exchange contract, according to which one party (the seller) undertakes to sell to the other (the buyer) a certain amount of foreign currency at a certain point in the future at a price fixed at the time of the conclusion of this contract. It can be seen from the definition that futures and forward contracts are very similar to each other. However, a futures contract has a number of differences due to the fact that a futures contract is a forward currency transaction concluded on the stock exchange.
The first difference is that when concluding a futures contract, it is not required to agree on all its conditions: the quantity, term and method of supply of the base currency are standard and are determined by the exchange specification. In this regard, futures contracts have high liquidity and there is an active secondary market for them on the issuing exchange. Because of this, banks can quite easily close their positions in futures contracts by making a counter-trade with the same number of contracts in which the position was open. Therefore, futures contracts are concluded most often for speculative purposes and, as world practice shows, only 2-5% of futures contracts end with a real supply of currency.
Since the terms of the futures contract are standard, the participants in the futures transaction are traded only for the price at which it will be concluded, as well as for the number of contracts to be concluded.
The second difference is that under a futures contract there is practically no risk of non-execution of the transaction by the counterparty, which is so great when concluding any OTC contract, including a forward one. This is achieved due to the guarantee of its execution by the exchange, which often itself acts as the opposite side for each concluded trace.
Another difference is that when concluding a futures contract, its participants incur costs in the form of a commission, which they pay to the members of the exchange, if they themselves are not.
To open a position in a futures contract, you must deposit a certain amount of cash or securities, called the initial margin. These funds in a certain way provide protection to the exchange, which guarantees its execution.
Another way to protect the exchange from losses in case of non-fulfillment by clients of the contracts they have concluded is the daily revaluation of their open positions, which
which is carried out according to the same rule as in the case of settlement forward execution. Only the settlement price is used as the current rate, which is determined on the basis of supply prices for each type of concluded futures contracts. At the end of each trading day, the clearing house of the exchange transfers the amount of winnings from the accounts of the losers to the accounts of the winning bidders. These amounts are called variation margin. Thus, participants in futures trading are aware of their profits or losses on futures contracts on a daily basis. They can either withdraw their profits or have to cover their losses.
If positions on currency futures contracts remain open until the date of their execution, then settlements on them are made in the manner established by the exchange.
In a simplified form, the procedure for carrying out transactions in currency futures can be represented as follows (see Fig. 18.3).

For example, if a deal is concluded now, then the date for the execution of the contract can be set after a certain date.

The term of execution for currency transactions on Forex, as a rule, is no more than a year. And those transactions, the maturity of which is more than a year, are called super-forward transactions.

Consider the main elements that a currency forward contract contains:

1. There must be an agreed transaction date. There is a time limit for a forward in the global market. Usually it has the following boundaries: a month, 3 or 6 months, a year. If the value date is irregular, then the contract may have ten days, a month and 10 days.

2. Forward rate. The exchange rates for forward transactions act as these rates. This is a well-known way to mitigate the risk associated with changes by fixing the exchange rate.

For any foreign exchange transactions are necessary in order to maintain the value of assets in their currency terms. With the help of forward operations, you can fix the exchange rate in advance, this allows you to reduce any costs in the exchange process, makes it possible to focus on the main tasks and ways to solve them.

The exchange rate for forward transactions on Forex differs from the exchange rate for the spot market. It can be less or more than the latter by a certain number of forward points. This difference is called the discount or premium. Its level depends on the margin requirements that exist in relation to the sold / bought currency, as well as on the time limits provided for in the market for transactions with forward conditions.

Discounts are provided for currencies with a high interest rate. This means that in Forex the rates of forward contracts are lower than the quotes in the spot market. Currencies that have a low interest rate have a premium. This means that in Forex, forward transactions in these currencies have higher quotes than those in the spot market.

It is important to know that in the interbank currency market, forward transactions are sometimes associated with a floating loss. When it is equal to 80 percent of the amount of collateral on deposit, the bank informs its client that there is a need to deposit more additional funds. When the client does not want it or cannot, the bank closes the transaction forcibly. The costs are reimbursed by the client.

Schematically, the procedure for foreign exchange transactions with a bank on forward terms can be represented as follows:

one). An entrepreneur signs an agreement with a commercial bank to conduct transactions on the currency market.

2). Then he opens a currency account. The amount on the account must be at least 10 percent of the total amount of the transaction.

3). The entrepreneur writes an application for a forward transaction. It is signed by a representative of the bank, certified by a seal.