Forex Trading | Online Forex Trading | Forward Forex Currency Trading

Most major currencies can also be bought and sold for sometime in the future. Such transactions are referred to as Forward Forex or forward exchange contracts. The delivery date and dealing price are agreed at the time the contract is made. In foreign currencies for which an active market exists, purchases and sales for delivery in three months, six months, one year and even five years are not uncommon.

Forward foreign exchange or forward forex may be purchased in order to cover imports. For example lets suppose a Japanese exporter had agreed to sell goods to the United States for Yen 20,000,000 at a time when the Yen was quoted at Yen 118/$1, creating a US Dollar cost of $169,491.52.

Suppose, however, that the price of a Yen has gone up to Yen 108.7/$1 by the time the goods had arrived and payment must be made. $169,491.52 will then only purchase Yen 18,423,728.

For the additional amount of Yen 1,576,272 needed to meet its commitment, the US importer will have to pay an additional $14,501.12.

The importer could have protected himself against this unfavourable movement in the exchange rate at the time of the import commitment by purchasing Yen 20,000,000 forward for delivery when it planned to make payment.

For example lets suppose that Yen are being quoted at 116 three months forward, or at a 6.77% premium computed as follows:

(118-116) X 4

118 = 6.77% premium

Thus the forward purchase of Yen 20,000,000 three months forward will cost the importer $172,413.79. Thus the importer might choose to incur the extra cost of $2,922.27 ($172,413.79 less $169,491.52) to eliminate the uncertainty of a larger cost later on.

Conversely, if the Yen/$ exchange rate had moved to Yen 120/$1 the US importer would have saved $2,824.86 (Yen 20,000,000/118 less Yen 20,000,000/120).

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