What is forward exchange contract?
A forward exchange contract (FEC) is an agreement between two parties to effect a currency transaction, usually involving a currency pair not readily accessible on forex markets. FECs are traded OTC with customizable terms and conditions, many times referencing currencies that are illiquid, blocked, or inconvertible.
What are the types of forward exchange contract?
Following are the types of forward contracts:
- Window Forwards. Such forward contracts allow investors to buy the currencies within a range of settlement dates. …
- Long-Dated Forwards. …
- Non-Deliverable Forwards (NDFs) …
- Flexible Forward. …
- Closed Outright Forward. …
- Fixed Date Forward Contracts. …
- Option Forward Contract.
What are the features of forward exchange contract?
The main features of forward contracts are: * They are bilateral contracts and hence exposed to counter-party risk. * Each contract is custom designed, and hence is unique in terms of contract size, expiration date and the asset type and quality. * The contract price is generally not available in public domain.
What is forward exchange rate with example?
For example, a company expecting to receive €20 million in 90 days, can enter into a forward contract to deliver the €20 million and receive equivalent US dollars in 90 days at an exchange rate specified today. This rate is called forward exchange rate.
What are the advantages of forward contract?
The advantages of forward contracts are as follows:1) They can be matched against the time period of exposure as well as for the cash size of theexposure. 2) Forwards are tailor made and can be written for any amount and term. 3) It offers a complete hedge. 4) Forwards are over-the-counter products.
How is forward exchange contract calculated?
To calculate the forward rate, multiply the spot rate by the ratio of interest rates and adjust for the time until expiration. So, the forward rate is equal to the spot rate x (1 + domestic interest rate) / (1 + foreign interest rate). As an example, assume the current U.S. dollar-to-euro exchange rate is $1.1365.
What are the advantages and disadvantages of forward contract?
The most common advantages include easy pricing, high liquidity, and risk hedging. The major disadvantages include no control over future events, price fluctuations, and the potential reduction in asset prices as the expiration date approaches.
What is the difference between futures and forwards?
A forward contract is a private and customizable agreement that settles at the end of the agreement and is traded over the counter. A futures contract has standardized terms and is traded on an exchange, where prices are settled on a daily basis until the end of the contract.
Can you cancel a forward contract?
Overdue Forward Contracts
The customer has the right to utilise or cancel or extend the forward contract on or before its due date. No such right exists after the expiry of the contract.
What is the limitations of forward contract?
The disadvantages of forward contracts are: It requires tying up capital. There are no intermediate cash flows before settlement. It is subject to default risk.