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Currency Forwards

by Danijel
Currency Forwards

Currency Forwards

Despite not being considered ‘mainstream’, a lot of actual trading volume on Forex markets happens in the form of currency forwards. While it seems unlikely that an average Forex trader will actually partake in a currency forward in their lifetime is relatively low, any savvy trader should aspire to greatness, and when it comes to modern financial or alternative trading markets, forwards are a sign of true greatness.

Currency forwards defined

Strictly speaking, forwards are contracts between two or more parties that effectively determine the way a deal will happen on a future date, as well as general conditions under which said deal will transpire. In Forex terms, a currency forward would fix the exchange rate for an extended period, usually without any form of payment in advance. The actual exchange is arranged in advance, but not executed until a later date. Since a currency forward is a legally binding document, it can be hard to back out of without consequences, and often proves highly profitable for at least one of the parties. This is especially true in case of major shifts on the market compared to when the contract was entered. While their currency volume is quite high, there are relatively few currency forwards on the market. This, coupled with the fact that there are only so few players big enough to enter this kind of an arrangement makes any form of official oversight completely redundant. These contracts are as close to the original Forex market as they come. Any disputes are settled ‘privately’, between banks, corporations, tycoons and other financial entities. This is an exclusive club, and as these things usually go, its members get lots of perks. These entities form a close-knit circle where trading conditions are far better than anywhere else on the market. Their actions can be coordinated and they often tend to look after one another, giving them a distinct advantage on top of what they already have in terms of funds and influence. This is a marriage of convenience, as the sheer size and scope of these deals can only be matched by a handful of players, so it might behoove them to keep things friendly.

What does this have to do with me?

Currency forwards are the basic types of derivatives on the market, as well as a foundation for most of said derivatives. As such, you need to know what they are and how they are used in order to compete against banks, agencies, corporations and fund managers which normally use them. Besides, many other types of derivatives, the ones you will get to use, such as currency futures, swaps and options essentially operate on the same principles as forwards, albeit under slightly different conditions. Forwards feature the least regulation of all derivatives, they offer utmost discretion, as well as enough versatility to accommodate the pickiest of clients, as long as they could afford them, of course. On the other hand, forwards also exemplify all that could possibly go wrong, as well.


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