Features of Forward Exchange Contract

Exchange rate is not always stable, it keeps on changing every three seconds, therefore by the time exporter or importer has executed the contract and realized his bill, exchange rate might have turn adverse for him bringing unexpected losses to him.

To overcome this risk forward contract can be used, which is defined as a contract which is entered by two parties for purchase or sale of foreign currency at an agreed rate at a future date. The rate specified in forward contract is called forward rate. Here are some of the features of forward exchange contract –

1. Forward rate for a currency is not equal to spot rate, it may at premium that is higher or at discount that is lower than spot rate.

2. The premium and discount on forward rate in a free market will be equal to the differences between interest rates in the two currencies.

3. A forward contract has no secondary market, it is written over the counter to suit the specific exposure requirement of the clients of the banks.

4. Apart from demand and supply of currency there are other factors like sudden movements in capital, activities of speculators, intervention by the central banks in foreign exchange market which influences the forward rates.

5. Forward exchange contracts can either be fixed forward contract or option forward contract. Under fixed contract the transactions will have to be completed on the specified forward date, while under option contract the transactions will have to be completed within a specified period and not on specified date which cannot exceed one calendar month.

0 comments… add one

Leave a Comment

Related pages

profit ratioswhat are the disadvantages of globalizationfund flow statement definitiondual aspect concept of accounting with examplesconsumer nondurable goodscapital convertibilityprepaid insurance entryfunctions of regional rural banksdifference between tariffs and quotasfullform of tdsselling debenturestransfer pricing advantages disadvantageswhat is an unearned revenuesystematic vs unsystematic risksystematic and unsystematic risk examplessecuritization of receivablesdiminishing marginal utility exampleskyc abbreviationadvantages of lifo inventory methodjunk bonds advantages and disadvantagescharacteristics of authoritarian leadershipbenefits of privatisationformula for working capital turnover ratioskim strategydistinguish between implicit cost and explicit costdefine contingent liabilitiesfreight inwardspayback period meaningadvantages and disadvantages of bank overdraftrecording unearned revenueinventory turnover ratio interpretationpros and cons of command economyjournal entry for bad debtscost oriented pricing methodsdisadvantage of vertical integrationloan capital advantages and disadvantagesfeatures of perfect competition in economicsmonopolistic marketsadvantages and disadvantages of accounting rate of returnindustrialization advantagesaccounting entry for prepaid expensesdisadvantages of functional organisationbenefits of jit manufacturingbenefits of absorption costingdisadvantages of cashless policydefine subventiondisadvantages of merger and acquisitioncrr and slr meaningadvantages and disadvantages of a command economysundry assets definitionadvantages and disadvantages of variable costingcreditors turnover ratioweaknesses of command economysocial media advertising advantages and disadvantagesdisadvantages of global tradeunbilled revenueexamples of inferior goodsexample of price skimming strategydisadvantages of marginal costingdvr stockswot analysis disadvantageswhat are the drawbacks of democracyipo fullformdifference between capitalist economy and socialist economydirect quotation and indirect quotationadvantage and disadvantages of social mediajob costing advantagesthe difference between monopoly and oligopolydcf techniquesoligopoly equilibriumwhat is the definition of current liabilitieswhat is a horizontal monopoly