Forward Forex Transaction

Forward foreign exchange transaction is a kind of financial transaction conducted in the foreign exchange market. Its characteristic is that the two parties agree on a specific date or period in the future when the transaction is concluded. According to the exchange rate agreed in advance, one currency will be purchased or sold for another specific currency. Amount Currency Transaction. Forward foreign exchange transactions can be divided into two types: forward foreign exchange transactions involving the exchange of New Taiwan Dollars and forward foreign exchange transactions between foreign currencies that do not involve the exchange of New Taiwan Dollars.

The purpose of forward foreign exchange transactions is to avoid or transfer the risk of future exchange rate fluctuations, or to obtain interest rate differentials. Participants in forward foreign exchange transactions include various import and export traders, multinational companies, financial institutions, investors, speculators, etc. The price of forward foreign exchange transactions is called the forward exchange rate, and its calculation formula is: forward exchange rate = spot exchange rate + exchange points.

How to Conduct Forward Forex Transactions

1. Determine transaction needs: According to your own foreign exchange income and expenditure plan, determine the currency, amount, date and purpose of forward foreign exchange transactions.

2. Choose a transaction partner: Based on your credit rating, capital size, transaction frequency and other factors, choose a financial institution or foreign exchange dealer with a good reputation, high quality service and reasonable quotation as the transaction partner.

3. Agree on transaction conditions: Negotiate with the transaction counterparty and agree on the contents of the forward foreign exchange contract, including transaction currency and amount, forward exchange rate, delivery date or period, delivery method, other terms, etc.

4. Signing a contract: After confirming that the contract content is correct, sign a formal forward foreign exchange contract with the transaction partner and pay a deposit or other fees in accordance with the contract.

5. Fulfilling the contract: On the expiration date or within the period, currency delivery is carried out with the transaction counterparty according to the exchange rate and method agreed in the contract, and the forward foreign exchange transaction is completed.

Pros and Cons of Forward Forex Transactions

The advantage of forward foreign exchange transactions is that it can lock in future costs or benefits and reduce losses or missed opportunities caused by exchange rate fluctuations. Forward foreign exchange transactions can also provide more flexibility and diversity, because both parties to the transaction can freely agree on the delivery date, amount and currency. In addition, forward foreign exchange transactions can also be used as the basis or component of other derivative financial products, such as forward interest rate agreements (FRA), options, swap contracts, etc.

The disadvantage of forward foreign exchange transactions is the need to bear the credit risk of the counterparty, that is, if the counterparty cannot perform on the maturity date, losses may occur. Therefore, a certain credit rating or margin is usually required as a guarantee. Another disadvantage is that forward foreign exchange transactions lack liquidity and transparency, because they are conducted in non-unified over-the-counter markets, there is no unified quotation and transaction information, and there is no unified supervision and regulation. Therefore, participants need to spend more time and cost.