Forward Market

The forward currency market consists of two instruments: forward

outright deals and swaps. A swap deal is unusual among the rest of the

foreign exchange instruments in the fact that it consists of two deals, or legs.

All the other transactions consist of single deals. In its original form, a swap

deal is a combination of a spot deal and a forward outright deal.

Generally, this market includes only cash transactions. Therefore,

currency futures contracts, although a special breed of forward outright

transactions, are analyzed separately.

According to figures published by the Bank for International

Settlements, the percentage share of the forward market was 57 percent in

1998 (See Figure 3.1). Translated into U.S. dollars, out of an estimated daily

gross turnover of US$1.49 trillion, the total forward market represents

US$900 billion.

In the forward market there is no norm with regard to the settlement

dates, which range from 3 days to 3 years. Volume in currency swaps longer

than one year tends to be light but, technically, there is no impediment to

making these deals. Any date past the spot date and within the above range

may be a forward settlement, provided that it is a valid business day for both

currencies. The forward markets are decentralized markets, with players

around the world entering into a variety of deals either on a one-on-one basis

or through brokers. In contrast, the currency futures market is a centralized

market, in which all the deals are executed on trading floors provided by

different exchanges. 

Whereas in the futures market only a handful of foreign currencies may

be traded in multiples of standardized amounts, the forward markets are

open to any currencies in any amount. The forward price consists of two

significant parts: the spot exchange rate and the forward spread. The spot

rate is the main building block. The forward price is derived from the spot

price by adjusting the spot price with the forward spread, so it follows that

both forward outright and swap deals are derivative instruments. The forward

spread is also known as the forward points or the forward pips. The forward

spread is necessary for adjusting the spot rate for specific settlement dates

different from the spot date. It holds, then, that the maturity date is another

determining factor of the forward price. Just as in the case of the spot

market, the left side of the quote is the bid side, and the right side is the offer

side.



key word : forex,learn forex,free forex,profit from forex,about of forex,trading forex