Forward viewthread. forward transaction
Forward (Forward contract) - an agreement between a buyer and a seller, according to which one is obliged to buy and the other to sell the underlying asset at an agreed price, in fixed time. In addition, additional parameters may be included in the terms of a forward contract, for example, such as: quality of goods, packaging, place of transfer of goods, etc.
Forwards vs futures
A forward is similar in nature to a futures, but has some differences. Home hallmark forward contract from futures is that it is an over-the-counter transaction and, therefore, is not bound by the standards and restrictions imposed on futures.
But at the same time, the over-the-counter circulation of forwards entails a number of certain disadvantages. In particular, there is no clear control over the conclusion and circulation of forward contracts, and besides, the credit risks associated with them can be quite significant (after all, no one guarantees that the parties to the contract will fulfill their obligations in full). Unlike futures with their absolute transparency, full control by the exchange and guaranteed by the same exchange to ensure the fulfillment of obligations under them.
A forward contract, for example, is an agreement between a farmer who undertakes to deliver a certain amount of wheat by autumn and a flour producer who undertakes to buy this wheat from him at a predetermined price. In this case, both the farmer and the flour producer insure themselves against unforeseen price changes in the future and agree in advance on a mutually beneficial price for the supply of wheat. In addition, they can also specify in advance, for example, such parameters as the quality of the supplied wheat, its grade, etc.
That is, all parameters of the forward contract are set to individually. And if there are hundreds and thousands of identical futures contracts (matching in all respects), then in the case of forwards it will be difficult to find at least a few completely identical ones.
Table 1. Main parameters of a forward contract
Parameter | Description |
Underlying asset (subject of the contract) | The underlying asset of a forward can be commodities, currency pairs, interest rates |
Scope of delivery | This is, in fact, the amount of the underlying asset, the delivery of which must be ensured by the date specified in the terms of the contract |
date of delivery | The date upon which the delivery of the underlying asset must be ensured in the amount and on the terms specified in the contract |
forward price | This is the current price of the forward contract (it may change over time) |
Delivery price | This is the price at which the underlying asset will be sold at the time of the delivery date (it remains unchanged) |
Forward agreement price | Represents the difference between the current forward price and the delivery price. Used, for example, to resell a contract on the secondary market |
Finally, another important point is liquidity. Futures contracts, again due to their standardization and exchange nature of circulation, are quite easy to both buy and sell with minimum commissions and spread costs. But for forward contracts, due to their non-standard, it is quite difficult (and sometimes even impossible) to find a buyer. However, they are not originally intended for resale, but are of a pronounced individual nature, which allows them to be used, including in highly specialized aspects of business.
Types of forward contracts
Forward contracts are divided into three main types:
- Deliverable forward contract. This type of contract ends with the delivery of goods (object of the transaction). An example of a supply contract is the relationship between the aforementioned Mr. X and Mr. Y, when at the time of the execution of the contract one of them received the agreed amount of goods;
- Settlement forward contract. In this case, the completion of the contract does not imply the delivery of goods (object of the transaction). This type of contract implies that one party will pay the other party the difference in price. This refers to the difference between the price at the time of the conclusion of the contract and the price at the time of its execution. This type includes, for example, most foreign exchange forward contracts;
- Currency forward. A specific feature of this type of contract is that it involves the exchange of currencies (one for another, between the parties) at a pre-fixed rate.
In addition, all forwards can be classified according to the type of underlying asset. In the case when the subject of a forward agreement is the supply of a commodity (agricultural products, energy resources, etc.), they speak of commodity forwards. And when various kinds of financial assets (securities, interest rates, currency) act as the underlying asset, then we are talking about financial forwards.
Finally, one can single out separate categories forward contracts by the parties to the transaction:
- Contracts concluded with banks (or between banks);
- Contracts concluded by manufacturers of products with suppliers.
Distinctive features of forwards, their advantages and disadvantages
Forward contracts, unlike futures, are concluded on the so-called over-the-counter market. This fact entails certain advantages:
- There are no costs for concluding contracts of this kind (unlike futures, where the exchange takes a certain commission and requires a guarantee deposit);
- A wide choice in terms of the conditions for the execution of such contracts (regarding the timing, quality of goods, etc.). There are no strict restrictions due to the standardization of similar futures contracts on the exchange;
- Forwards do not require mandatory reporting, unlike all contracts concluded on the exchange market.
So are the disadvantages:
- There are no such guarantees for the performance of the contract, which the exchange provides. In case of violation of the conditions of one of the parties, the other can only rely on the protection of their interests in court;
- A forward cannot also be simply sold on a secondary market as, for example, futures. Precisely because of their non-standard conditions, forward contracts have very low liquidity.
Forward contract example
Suppose two people decide to enter into a forward contract between themselves. Let's call these people conditionally Mr. X and Mr. Y.
In other words, Mr. X agrees to buy and Mr. Y agrees to sell a specified amount of grain of wheat at a specified price.
Of course, in addition to price and quantity, they also discussed other aspects of the upcoming deal, such as the variety and quality of grain, delivery terms, etc.
Nearly six months pass and the deadline for the execution of the concluded forward contract comes. And now, despite the current market price of grain, the transaction must be carried out on pre-agreed conditions. That is, Mr. X sells one ton of wheat grain to Mr. Ygrek for 10,000 rubles (even if at the moment the market price has risen, for example, to 15,000 rubles). And Mr. Igrek buys one ton of this grain from Mr. X for the agreed 10,000 rubles (even if suddenly, by the time the transaction is made, the price of wheat drops to 5,000 rubles per ton).
What is the essence and meaning of the concluded forward contract for the participants in the transaction X and Ygrek?
Everything is very simple. Mr. X cannot buy one ton of grain in winter (that is, right now at the current price of 10,000 rubles / ton) for the reason that he simply has nowhere to store it. He won't need the grain until the beginning of summer, but he fears the fact that by that time prices may rise significantly. Therefore, by entering into a forward contract, he is insured against a possible price increase.
Mr. Ygrek, who has huge grain reserves, is also simply not able to take and sell them today, at the current market price of 10,000 rubles per ton (due to the fact that there are not so many buyers). Therefore, fearing that by the beginning of summer the price of grain could drop significantly, he insures his risk by entering into forward contracts with buyers at a fixed price of 10,000 rubles per ton that suits him.
The price at which the parties entering into a forward contract between themselves agreed to conduct a transaction is called the delivery price.
Risks of forward contracts
Of course, entering into forward contracts is not without a certain amount of risk. Since it (the contract), although it obliges the parties to fulfill it, it cannot guarantee it.
So one of the parties may be insolvent as a result of bankruptcy, and the other may not provide the agreed quantity of goods of good quality, due to its damage or loss.
In addition, one of the parties may be simply dishonest. Therefore, in the above example, Mr. X must be sure that Mr. Y values his reputation and will fulfill his obligations in any case. And Mr. Y, in turn, must be sure of the solvency of X.
Legislative aspect
As for the protection of the interests of the parties to forward contracts in court, in countries with developed market economies this has not been a problem for a long time. The legislation of such countries as the USA, Great Britain, etc. makes it possible to defend one's rights very successfully in matters of this kind. In our country, for obvious reasons (the market economy replaced the planned economy only in the early 1990s), things are far from being so simple.
In domestic legislation, until recently, there was a very ambiguous position regarding the protection of the interests of participants in forward agreements. The fact is that, for example, settled forwards are by their nature very similar to betting. That is, both participants, on an absolutely voluntary basis, make a kind of bet on whether the price of the forward's underlying asset will rise or fall. Well, betting is a purely voluntary matter and not regulated by law.
The situation began to change from the beginning of the 2000s, after considering a large number of cases related to the regulation of relations between participants in forward agreements, in which everything rested on the question of what, in fact, is a forward from the point of view of modern legislation - a bet or a financial transaction (in in particular, the decision of the Constitutional Court of the Russian Federation of December 16, 2002 No. 282-0 regarding the complaint of Société Générale bank).
The main differences between purely gaming risk (when making a bet) and business risk (when concluding a forward contract) were identified. For example, if during the game the main driving force and motive is the passion of the players themselves, then when concluding a forward contract, the risk is mainly of an entrepreneurial nature. Concluding a game bet aims to enjoy the process, feel the excitement and, if possible, make a profit. The purpose of entering into a forward agreement is to make a profit or to hedge risks.
At present, if at least one of the parties to the forward contract is a legal entity that has a license from the Central Bank of the Russian Federation for banking, brokerage or dealer activities, the protection of the interests of the parties from the side of the law will be ensured.
Forward contract as a risk hedging tool
Along with other derivatives market instruments (such as options and futures), forwards are actively used by entrepreneurs, banks, as well as ordinary traders and investors to hedge their risks.
The essence of hedging is solely to minimize losses that are possible in case of unfavorable developments in certain markets. Its purpose is not to make a profit.
Typically, the following types of risks are subject to hedging:
- Commodity risk associated with such factors as inflation, changes in the ratio of supply and demand and others, one way or another affecting the current and future prices of goods;
- Currency risk is associated with a possible adverse change in the exchange rate national currency;
- associated with unfavorable changes in interest rates.
A simple example of hedging through the conclusion of a forward contract is when a manufacturer of a product, insuring against a possible price reduction, enters into an agreement for delivery after a certain period. At the same time, the volume of products that is the subject of the contract does not necessarily have to be produced and be in the warehouses of the enterprise at the time of signing the forward agreement. It is enough to ensure the delivery of the entire volume by the time the contract is executed.
In this case, by the time of delivery, the following scenarios are possible:
- The price of the products will remain unchanged. In this case, both parties to the forward contract will remain, as they say, with their own;
- The price of the supplied products will decrease. In this case, the manufacturer's fears will be confirmed, but due to the fact that he concluded a forward contract in a timely manner, he will be able to sell his products at a price higher than the market price;
- The price of the supplied products will increase. If the manufacturer were not bound by the terms of the forward contract concluded earlier, he would be able to sell his products at new, more favorable prices. But, as they say, if I knew the buyback, I would live in Sochi. Lost profit, in this case, should be considered as a payment for the absence of risk.
forward contract- a certain agreement concluded between the two parties on the forthcoming delivery of the underlying asset.
The existing terms of the contract are negotiated at the time of its conclusion. A forward contract is executed on the basis of these conditions and on time.
What are the features of a forward contract?
The conclusion of a forward contract does not provide for any costs, with the exception of those commissions that will be spent on processing the transaction, if it is carried out with the help of an intermediary.
Is forward contract, usually for the purpose of buying or selling a required asset, in addition to insuring a supplier or some buyer against a potentially unwanted price change. Counterparties, on the other hand, are insured against undesirable developments, not being able to take advantage of a potentially favorable market situation.
The terms of the forward contract stipulate the obligation to perform, but despite this, the counterparties are still not 100% insured against its non-performance. For example, due to the bad faith of any of the participants in the transaction or the bankruptcy of the company. Therefore, before concluding a deal, you need to make sure that both parties are solvent and reputable.
Also, a forward contract can be concluded, in which the goal is to play on the difference in the value of the asset rate. A buying analyst expects the price of the underlying asset to rise, and a selling analyst expects the asset price to fall.
For its primary purpose, a forward contract is considered an individual type of contract. For this reason, other markets for forward contracts for a large share of assets are poorly developed or not developed at all. An exception here may be forward.
When signing a forward contract, both parties agree on the price of the transaction. This price is called the delivery price, after which it remains constant throughout the duration of this forward contract.
With the advent of the forward contract, the concept of a certain forward price appeared. Relative to each time interval, the forward price, for the current underlying asset, is the delivery price noted in the contract signed to date.
Legal features and types of forward contracts
Let us examine in more detail the legal features of forward contracts. As we have already said, the forward type of contract involves the real delivery of any product as the final result. Since the object of the forward is the real product, that is, the things that are available. With all this, the reference to the validity of the goods should in no way infringe on the right of the seller to conclude a contract for the sale of goods that will be manufactured or purchased by the person selling the goods in the future.
A forward contract is enforced some time later, after its direct conclusion.
A forward is a justified opportunity to insure profits.
Before concluding such an agreement, its important conditions are stipulated, namely:
- terms
- total quantity of goods
- its price, which is not completed before a specific delivery date.
This type of risk insurance is called hedging in the market. base price goods in all forward transactions is different from its price in cash transactions. In addition, it can be set both at the time of signing the contract, and during the calculation and delivery.
The execution cost of a forward transaction (which is determined for the period of its implementation) is some average exchange price indicator for this product.
The forward price is the result of the participants' assessment of all possible factors influencing the market, and all further prospects for the development of related events on it.
Price ratio in forward contracts
In the process of development of the foreign exchange market, forward contracts began to be divided according to the method of delivery into the following types:
delivery type of forward contracts;
further, settlement forward contracts, in other words, non-deliverable types of forward contracts.
As for supply contracts, the delivery under them is calculated initially, and mutual settlement is made by paying one of the parties the resulting difference in the cost of the goods or a previously established amount, based on the terms of the contract.
When working with settlement types of contracts, the delivery of goods (ie the underlying asset) is not provided from the beginning of the transaction. Such contracts allow the losing party to pay a set amount of money, the difference between the price itself, stipulated in the contract and the current market price on a specific date.
The calculation for this amount (also called the variation margin) is made at a previously appointed time, as a rule, in relation to the delivery of the basis.
Determining the forward price
Based on the theory, in the process of determining the forward price, 2 concepts are usually distinguished:
The first is that the forward price arises as a result of the upcoming expectations of all participants in the futures exchange, in relation to the upcoming spot price.
The second type of concept is based on the arbitrage method. According to the provisions of the primary concept, all participants in economic relations are trying to take into account and consider all the information that they have in relation to the upcoming conjuncture and set the price of the future spot.
An arbitrage approach is built on the basis of technical mutual agreement between the current spot and forward prices, which is set without any possible risk.
The arbitrage approach is based on the following provision: on the basis of financial solution, the investor must be indifferent to receiving the underlying asset in the spot market now or under a forward contract in the future.
During the life of the forward contract, income on shares will either be paid or not.
If a profit is accrued per share during the validity of the contract, then the forward price must be changed by its value, because by signing the contract, the investor will not receive his dividends. Moreover, there is a definition of the forward price of the currency itself, based on the parity of % rates, which consists in the fact that the depositor is obliged to receive an equal return on placement Money at a certain percentage without significant risk in foreign, and necessarily.
Forward contract and mutual obligations
Suppose your company plans to purchase goods from a foreign partner for dollars in six months.
You know that now the dollar exchange rate, for example, is 60 rubles for 1 dollar. But you are afraid that in 6 months it will no longer be 60, but, say, 62.
And you conclude a six-month forward with the bank, in which you undertake to buy from him the amount of dollars you need at a price of 60 rubles. And by this you insure yourself against a possible adverse course change.
Forward contracts are transactions that are binding in the future. Usually they are used to minimize risks.
Read the article about the application schemes and the reasons for the popularity of forward agreements, their legal nature, advantages and disadvantages.
Future Trading Agreement
In a forward contract, the parties at the time of the conclusion of the transaction necessarily stipulate among themselves all the necessary conditions contract and a specific asset for sale or purchase, its quality, contract size, contractual execution price (delivery price), delivery time and place. From this follows the following definition of a forward contract.
This is a material agreement between two or more entities foreign economic activity and their foreign counterparties, aimed at establishing, changing or terminating their mutual rights and obligations in foreign economic activity.
A forward contract or forward is an agreement between two counterparties on the terms of a transaction with an underlying instrument (asset) that will take place in the future. Most often, such transactions take the form of buying or selling a specified amount of a specific type of underlying instrument at a fixed price at a certain date in the future.
A forward contract has a number of advantages, namely:
- as a rule, the object of trade in forward transactions is a product that will still be manufactured (grown) at the time of delivery, so bidders plan their profit in advance;
- the seller (commodity producer) has the opportunity to receive an advance payment from the buyer within 50% of the contract value and use it for the production of products;
- the buyer is insured against price increases and is provided with the supply of products for their own production (resale).
Despite the fact that the forward contract provides for mandatory performance, the counterparties are not immune from its failure, for example, bankruptcy or bad faith of one of the participants in the transaction. Therefore, before concluding a deal, partners should find out the solvency and reputation of each other.
Conclusion of the contract "Forward"
The conclusion of the contract consists of at least two stages:
- offers of one party to conclude a contract,
- acceptance of the offer by the other party.
Typically, forward contracts are used when delivering a large volume of goods.
For example, in the spring, an exporter enters into a forward contract with a commodity producer for the supply of produced grain. In this case, the parties are trying to resolve the issue of pricing at the stage of concluding a contract, and payment for the goods is negotiated separately.Exporters who take part in international tenders get the right to supply a certain volume of goods at a certain price, which is also the essence of a forward contract.
When signing the forward terms of the transaction, the parties pursue the mutual goal of mutual fulfillment of the appropriate requirements for both one and the other party to the contract.
Previously, an export contract is a written document containing an agreement between the parties on the supply of goods: the exporter's obligation to transfer certain goods to the buyer's property and the importer's obligation to accept this product and pay for it the necessary sum of money or obligations of the parties to comply with the terms of the trade transaction.
The foreign economic contract of sale contains an introductory part, details of the parties ( legal address and Bank details) and the following basic conditions:
- Subject and object of delivery (name and quantity of goods);
- Methods for determining the quality and quantity of goods;
- Time and place of delivery;
- Basic terms of delivery;
- Total price – delivery cost;
- Conditions of payment;
- The order of delivery and acceptance of goods;
- Transport conditions;
- Terms of guarantees and sanctions;
- Settlement of disputes;
- Circumstances of exemption from liability, force majeure.
The contract is signed by authorized persons and their signatures are sealed.
Source: "agrex.gov.ua"
Forward contracts are transactions with a deferred maturity
forward transaction is a transaction between two parties, the terms of which provide for a mandatory mutual one-time transfer of rights and obligations in relation to the underlying asset with a deferred date for the execution of the agreement from the date of the agreement.
Such a transaction is usually made in writing. The subject of the agreement can be various assets - commodities, stocks, bonds, currency, etc.
A forward contract is usually entered into for the purpose of actual sale or purchase of the relevant asset, including to insure the supplier or buyer against possible adverse price changes.
A forward contract may also be concluded for the purpose of playing on the difference in the rates of the underlying asset.
When concluding a forward contract, the parties agree on the price at which the transaction will be executed. This price is called the delivery price. It remains unchanged for the duration of the forward contract.
In connection with a forward contract, the concept of a forward price also arises. For each point in time, the forward price for that underlying asset is the delivery price fixed in the forward contract that was entered into at that point in time.
When determining the forward price of an asset, it is assumed that the depositor at the end of the period should receive the same financial results by purchasing a forward contract for the delivery of an asset or the asset itself.
In case of violation of this condition, it becomes possible to make an arbitration operation. If the forward price is higher (lower) than the spot price of the asset, then the arbitrageur sells (buys) the contract and buys (sells) the asset.
Spot price - the current market price of the underlying asset. When entering into a forward transaction, the party that opened a long position hopes to further growth prices of the underlying asset. When the price of the underlying asset rises, the buyer of the forward contract wins and the seller loses, and vice versa.Gains and losses on a forward trade are realized only after the expiration of the contract, when there is a movement of cash and assets.
The conclusion of a forward contract does not require any costs from the counterparties, with the exception of possible commissions associated with the execution of the transaction, if it is concluded with the help of intermediaries.
Despite the fact that a forward contract implies a mandatory performance, theoretically counterparties are not insured against default on the part of their partner due, for example, to bankruptcy or bad faith of one of the participants in the transaction.
Therefore, before concluding a deal, partners should find out the solvency and integrity of each other. The absence of guarantees for the performance of a forward contract in the event of an appropriate market situation for one of the parties is a disadvantage of a forward contract.
Another disadvantage of forward contracts is their low liquidity. Forward transactions are made off exchanges in unorganized markets.
All terms of the transaction - terms, price, guarantees, sanctions - are negotiated by the parties: since a forward transaction, as a rule, pursues the actual delivery of the corresponding asset, the counterparties agree on conditions that are convenient for them. Thus, the forward contract is not standard in its content.
It is believed that as a result of this secondary market for forward contracts, it is either very narrow or completely absent, since it is difficult to find any third party whose interests would exactly correspond to the terms of this contract, which was originally concluded within the framework of the needs of the first two parties.
In fact, the degree of liquidity of the forward market directly depends on the degree of liquidity of the underlying asset. For some underlying assets - for non-exchange goods, for unlisted corporate valuable papers- it will be narrow and illiquid, for others, on the contrary, it will be liquid, for example, for currency, government securities.
If the underlying asset is liquid, an arrangement executed in a forward contract may also be liquid. To do this, the parties provide for the possibility of transferring the contract to third parties during the term of the agreement. Thus, we can talk about the purchase and sale of forward contracts, which is still based on the purchase and sale of the underlying asset.
If a forward contract is sold in the secondary market, then it acquires a certain price because there is a difference between the delivery price and the current forward price.
The shape of the forward curve - the dependence of the prices of futures contracts on their term - significantly affects the behavior of spot market participants. When the prices of contracts with a longer expiration date are higher than the prices of near contracts, the market is in a state of contango.The shape of the price curve in this case allows us to conclude that the price of the underlying asset is expected to rise in the future, and the profitability of the buying and holding strategy stimulates buyers and leads to an increase in inventories, while the intertemporal spread should be comparable to the cost of storing goods.
If the prices of distant contracts are lower than the prices of nearby ones, i.e. the forward price curve is inverted, the market is in a state of backwardation. This shape of the curve leads to the fact that the accumulation of inventories becomes unprofitable for companies, which leads to their reduction.
Ultimately, spot rates almost never match the predicted values - the forward curve. But this does not mean that forward rates should not be in line with market forecasts of future spot rates.
At any given moment, the market absorbs all available information and sets spot and forward rates. At this point, the forward rate predicts the value of the spot rate in the future. However, various economic and political events and even catastrophes are possible during this time. All this changes market forecasts and is reflected in prices.
Not surprisingly, these rates turn out to be different in the end, and their difference does not contradict the facts of the coincidence of forward rates and predicted values of future spot rates. In order for the forecast to be correct, the participant must today correctly predict unexpected events that will occur before the execution of the forward transaction.
Prolongation transactions "report" (repo) and "deport" (reverse repo) act as a kind of short-term forward contract.
A repo is an agreement between counterparties, according to which one party sells securities to another with an obligation to buy them back from it after some time at a higher price. As a result of the transaction, the first party actually receives a loan secured by securities.
The interest on the loan is the difference in prices at which she sells and redeems the paper. Her income is the difference between the prices at which she first buys and then sells securities.
A repo transaction is an over-the-counter futures transaction. One party to the transaction is, for example, a speculator who has entered into a transaction for a period in order to obtain an exchange rate difference. The need for a prolongation transaction arises for him if the change in the exchange rate he predicted did not take place and the liquidation of the transaction does not bring profit.
However, the professional who made the deal expects that his forecast for a change in the exchange rate will come true in the near future, so it is necessary to extend the terms of the deal, i.e. prolong it.
Thus, a prolongation transaction is concluded by him in order to make a profit at the end of its term from the speculations he conducts under the transaction agreement concluded earlier. Deportation is much less common on the market - an operation that is the opposite of a report.
This trade is used by a "bear" - a professional bear - when the price of a security has not gone down or has gone down slightly and he expects a further decrease in the rate.
Deportation is also applied in the case when it is necessary to supply securities to your counterparty, and the broker or dealer does not have these securities. Then he resorts to deportation to fulfill his obligations.
A reverse repo is an agreement to buy securities with the obligation to sell them at a later date at a lower price. In this transaction, the person who buys the paper at a higher price actually receives it as a loan secured by money.The second person providing a loan in the form of securities receives income (interest on the loan) in the amount of the difference in the sale and redemption prices of securities.
Source: cic.ru
Why FC are the basis of all derivatives
Most complex view Investment products fall under the broad category of derivatives, or derivatives. Most investors find it difficult to understand the concept of a derivative. However, derivatives are used by government and banking institutions, asset management companies and other corporations to manage investment risk.
Therefore, it is important for investors to have a general understanding of this type of product and how professional investors use them.
Overview of a forward derivative contract
As a type of derivative product, forward contracts are a good example to give an overview of more complex derivatives such as futures, options and swap contracts.
Forward contracts are very popular because they are not regulated by the government, they guarantee the confidentiality of the seller and the buyer, and can also be modified to suit the requirements of both. Unfortunately, due to the opacity of forward contracts, the size of the forward market is essentially unknown.
In turn, because of this, the principle of the forward contract market is less clear to investors compared to other derivatives markets.
Since forward contracts lack “transparency” at all, a number of questions may arise when using them:
- For example, the parties to a forward contract are subject to credit risk, or the risk of non-payment.
- Closing the trade can be problematic due to the lack of a formal clearing house.
- Large losses are also likely if the derivative contract is not properly structured.
As a result, in forward markets, there can be serious difficulties in moving funds from participants in this type of transactions to society as a whole. Today, such problems as the systematic non-fulfillment of obligations by the parties to a forward contract have not yet been resolved.
However economic principle"too big to fail" will always sound tempting as long as large institutions are allowed to guarantee forward contracts. The problem gets even bigger when the options and swaps market is taken into account.
Trading and settlement procedures
Forward contracts are traded on the OTC market. They are not traded on such exchanges as NYSE (New York Stock Exchange), NYMEX (New York commodity exchange), CME (Chicago Mercantile Exchange), and CBOE (Chicago Options Exchange).
When the forward contract expires, the trade can be settled in one of 2 ways:
- The first of these is carried out by "delivery".
- Therefore, forward contracts can also be settled in another way, known as "cash settlement".
This type of arrangement implies that the party holding the "long" forward contract will pay the funds to the holder of the short position in this contract when the asset is delivered and the transaction is completed.
Although the essence of the concept of "delivery" is easy to understand, the direct delivery of the relevant asset can be very difficult for the owner of a short position.This type of settlement is more complicated than "delivery", but nevertheless it is quite logical. For example, suppose that at the beginning of the year, a grain company entered into a forward contract with a farmer to buy 1 million bushels of grain (1 bushel in the US is approximately 35.2 liters) on November 30 of that year at a price of $5 per bushel.
Let us assume that by the end of November the price of grain for open market reached $4 per bushel. Thus, a company that went long on a forward contract should receive an asset from the farmer that is now worth $4 per bushel.
However, since the parties agreed at the beginning of the year to pay $5 per bushel, the company can simply ask the farmer to sell the grain on the open market at $4 per bushel and then make a cash payment to the farmer at $1 per bushel.
Then the farmer will get the same $5 per bushel of grain. On the other side of the deal, the company would then simply purchase the required number of bushels of grain on the open market at $4 per bushel. As a result, the company will settle with the farmer in the form of $ 1 for each bushel of grain. In this case, cash was used to simplify the delivery process.
Overview of currency FC
Terms of use of derivative contracts can turn them into complex financial instrument. A foreign exchange forward contract serves good example.
However, before understanding the essence of a currency forward transaction, it is important to understand how currencies are quoted to the public and how they are used by institutional investors.
If a tourist comes to Times Square in New York, then the currency exchange offices will, in all likelihood, be presented with exchange rates foreign currencies for 1 US dollar. This type of conversion is very popular and is known as an indirect quote. Most investors, most likely, this is how they imagine currency exchange.
However, institutional investors financial analysis use the direct quote method. This defines the amount of national currency per unit foreign exchange.
This method was developed by securities industry analysts because institutional investors think in terms of the amount of national currency per unit of a particular share, and do not calculate how much shares can be bought for one unit of national currency.
Given this distinction, it is a direct quote that will be used to explain how a forward contract can be used to implement a covered interest arbitrage strategy.
Let's assume that an American foreign exchange trader works for a company that regularly sells its goods in Europe for euros, after which they need to be converted back into US dollars. In this case, the trader will most likely know the spot and forward rates between the US dollar and the euro on the open market, as well as the risk-free rate of return for both currencies.
For example, a currency trader knows that the US dollar to euro spot rate on the open market is $1.35 per euro, the US annualized risk-free rate is 1%, and the European risk-free interest rate is 4%.
An annual foreign exchange forward contract on the open market is quoted at $1.50 per euro. Having on hand this information, a currency trader is able to determine if covered interest arbitrage is possible, as well as how to open a position in order to receive a risk-free income for the company using a forward contract.
Covered Interest Arbitrage Strategy Example
Before turning to the covered interest arbitrage strategy, the currency trader first needs to determine what the forward contract between the dollar and the euro should be in terms of effective interest rates.
To do this, you need to make the following calculations: the spot rate of the US dollar for the euro is divided by the sum of one and the annual risk-free rate in the EU, and then multiplied by the sum of one and the annual risk-free rate in the US.
X(1 + 0.01) = 1.311
In this case, a one-year forward contract between the dollar and the euro should sell for $1.311 per euro. Since a similar one-year forward contract on the open market sells for $1.50 per euro, the currency trader realizes that the price of the forward contract on the open market is too high.
Since anything overpriced will subsequently be sold for profit, the far-sighted foreign exchange trader will sell the forward contract and purchase euros in the spot market to earn the risk-free rate of return on the investment.You can carry out the covered interest arbitrage operation in the following way:
- Step 1: The currency trader needs to have $1.298 and purchase €0.962 with it.
- Step 2: The trader needs to sell the forward contract in order to receive EUR 1.0 at the price of USD 1.50 by the end of the year.
- Step 3: Hold the euro position for a year, thus the trader earns interest in the amount of the European risk-free rate (4%).
- Step 4: Finally, when the forward contract expires, the trader will bet EUR 1.00 and receive USD 1.50.
To determine the amount of US dollars and euros required to implement the strategy of covered interest arbitrage, we need to divide the spot price of the contract (1.35 dollars per euro) by the amount of unit and the annual risk-free rate in the EU (4%):
1,35 / (1 + 0,04) = 1,298
In this case, $1,298 is needed to facilitate the transaction. The trader then determines how many euros will be needed to facilitate the trade. To do this, the unit is divided by the sum of the unit and the European annual risk-free rate (4%). The result is 0.962 euros.
1 / (1 + 0,04) = 0,962
This EUR position will increase in value from EUR 0.962 to EUR 1.00.
0.962 x (1 + 0.04) = 1.000
The trade described would be equivalent to a risk-free rate of return of 15.6%. You can determine it by dividing $1.50 by $1.298 and then subtracting one from the resulting amount.
(1,50 / 1,298) – 1 = 0,156
It is very important that investors understand the mechanics behind the covered percentage arbitrage strategy. This is a good illustration of why interest rate parity must always hold in order to prevent unlimited risk-free returns.
Relationship with other derivatives
Forward contracts can be designed in such a way that they turn into very complex financial instruments. The variety of forward contracts is increasing exponentially when you consider how many various types underlying financial instruments can be used when working with forward contracts.
Examples include securities forward contracts based on portfolios of individual securities or indices, fixed income forward contracts based on securities (such as Treasury bills), and interest rate forward contracts (such as LIBOR), better known as an agreement on the future interest rate.
It is also important for investors to understand that forward derivative contracts are generally considered the basis for futures, options and swap contracts. The reason is that futures contracts are basically standardized forward contracts with a formal exchange and clearing house.
Option contracts are essentially forward contracts that provide the investor with the right, but not the obligation, to complete the transaction at a certain point in time in the future.
Swap contracts are agreements in the form of a chain of forward contracts that require certain periodic actions from the investor.
Once the link between forward contracts and other derivatives is clear, investors can quickly understand the variety of financial instruments available and understand the implications of using derivatives in terms of risk management.
It also becomes clear how important the derivatives market is for government and banking institutions, as well as for large corporations around the world.
Source: "forextimes.ru"
Forward Contract and Price: Definition and Examples
A forward contract is a futures contract that is usually entered into off-exchange. This is an individual contract that meets the needs of counterparties. It is concluded to carry out a real sale or purchase of the underlying asset and insure the seller or buyer against possible adverse price changes.
The conclusion of the contract does not require any costs from counterparties (here we do not take into account possible overhead costs associated with the execution of the transaction, and commissions if it is concluded with the help of an intermediary). The execution of the contract takes place in accordance with the conditions that were agreed upon by the participants at the time of its conclusion.Example 1. On April 30, person X entered into a forward contract with person Y for the delivery on September 1 of 100 shares of company A at a price of 100 rubles. for one share. In accordance with the terms of the contract, person X will transfer 100 shares of company A to person Y on September 1, and person Y will pay 10,000 rubles for these securities.
A forward contract is a firm deal, i.e. a deal that is binding.
A person who undertakes to buy the underlying asset under a contract enters a long position, i.e. buys a contract. The person selling the underlying asset under the contract opens a short position, i.e. sells the contract.
The subject of forward contact can be different assets. However, in world practice, the forward currency market, and forward contracts are actively used to hedge currency risk.
Let us give examples of currency risk insurance with the help of a currency forward.
Example 2. An importer plans to buy goods abroad in three months. He needs currency. In order not to take risks, he decides to hedge the purchase of currency with a three-month forward on the US dollar. Banks offer three-month contracts at a price of $1 = 60 rubles. The importer buys a contract at this quote, that is, he concludes a contract with the bank, under which he undertakes to buy dollars.
Three months pass, the importer pays 60 rubles under the contract. for one dollar and receives the contract amount. At this point, the situation in the spot market can be any. Let's say the dollar exchange rate was 61 rubles. However, under the contract, the importer receives a dollar at 60 rubles.
Let the dollar exchange rate be equal to 59 rubles in three months, but the importer is obliged to fulfill the terms of the transaction and buy the dollar for 60 rubles. Thus, the conclusion of the forward contract insured the importer against unfavorable market conditions, but did not allow him to take advantage of the favorable situation.
AT this example there is a general pattern for futures contracts, namely: if they are insured against an increase in the price of the underlying asset, then they buy a contract, i.e. secure the purchase price for the future.
Example 3. Let the exporter appear instead of the importer in the conditions of example 2. In three months, he should receive foreign exchange earnings, which he plans to convert into rubles.
In order not to risk, the exporter hedges the future sale of dollars with a forward contract. He sells a forward for dollars to the bank, i.e., he concludes a contract with the bank, under which he undertakes to sell dollars to the bank at a price of 60 rubles. per dollar.
Three months pass, the exporter supplies dollars under the contract at a price of 60 rubles. for one dollar and receives the contract amount. The situation in the spot market at this moment can be any. Suppose the dollar exchange rate was 59 rubles. However, under the contract, the exporter sells the dollar at 60 rubles.
Let the dollar exchange rate be equal to 61 rubles in three months, but the exporter is obliged to fulfill the terms of the transaction and sell the dollar for 60 rubles. Thus, the conclusion of a forward contract insured the exporter against unfavorable market conditions, but did not allow him to take advantage of the favorable situation.
In this example, a general pattern arises for futures contracts, namely: if they insure against a fall in the price of the underlying asset, then they sell the contract, i.e. secure the selling price for the future.
Despite the fact that the forward contract assumes mandatory performance, counterparties are not insured against its non-performance due to, for example, bankruptcy or bad faith of one of the participants in the transaction. Thus, a forward contract is characterized by credit risk.A forward contract may be concluded for the purpose of playing on the difference in the market value of assets. A person who opens a long position expects an increase in the price of the underlying asset, a person who opens a short position expects a decrease in its price. Let us explain what has been said with examples.
Example 4. Playing for an increase. Let the speculator appear instead of the importer in Example 2. He expects that the dollar in three months will be 61 rubles. Therefore, the speculator buys a contract with a quote of $1 = 60 rubles.
Three months later, the dollar exchange rate on the spot market is 61 rubles. A speculator buys a dollar under a contract for 60 rubles. and immediately sells it on the spot market for 61 rubles, winning one ruble on one dollar. If the dollar exchange rate has fallen to 59 rubles by this moment, the speculator loses 1 ruble. He is obliged to fulfill the forward contract, i.e. buy a dollar for 60 rubles, but can now sell it only for 59 rubles.
In this example, a general pattern arises for futures contracts, namely: if they play for an increase, then they buy a contract, benefit from a price increase and lose from its fall.
Example 5. Playing for a fall. Let in the previous example, the speculator expects the dollar to fall in three months to 59 rubles. He plays for a fall, i.e. sells a contract for 60 rubles. Three months later, the dollar is worth 59 rubles. The speculator buys it on the spot market for 59 rubles. and delivers under a forward contract for 60 rubles, winning a ruble.
Let the dollar cost 61 rubles. To fulfill the contract, the speculator is forced to buy a dollar on the spot market for 61 rubles. and deliver it under the contract for 60 rubles. His loss is 1 rub. In this example, a general pattern arises when concluding futures contracts, namely: if they play for a fall, then they sell the contract, benefit from a price decrease and lose from its growth.
Foreign exchange forward contracts, as a rule, have standard maturities. Usually it is 1, 2, 3, 6, 9 and 12 months. According to its characteristics, the forward contract is individual. Therefore, the secondary market for forward contracts for most of the assets is not developed or underdeveloped. The exception is the forward foreign exchange market.
Forward price and delivery price
When concluding a forward contract, the price at which the transaction will be executed is agreed upon. It is called the delivery price. It remains unchanged throughout the duration of the contract.
There is also the concept of the forward price of the underlying asset. This is the price of an asset for a certain time in the future, such as a three-month forward price, a six-month forward price, and so on. It's over general concept compared to the concept of delivery price.It characterizes the conjuncture of a given asset relative to a certain point in time in the future.
When the parties to a contract agree on a delivery price, they take into account market conditions at that point and record this price as the delivery price under the contract. Since this price takes into account all market conditions, at this moment it is also the forward price of the asset for a certain point in time in the future.
At the following points in time, the market conditions will change, therefore, in new contracts for this asset, which expire simultaneously with our first contract, there will also be new price delivery and, accordingly, the new forward price of the underlying asset.
Therefore, we can say that for each point in time, the forward price of the underlying asset is the delivery price of the forward contract that was entered into at that moment. Thus, in the market at each moment of time for a certain date in the future there is a forward price of the underlying asset and it is equal to the delivery price of forward contracts concluded at that moment.
Example. On March 1, a forward contract is concluded for the delivery of shares of company A on July 1 at a price of 100 rubles. At the moment the contract is concluded, the forward price of a share for delivery on July 1 is equal to the delivery price, i.e. 100 rubles. On April 1, another contract is concluded for the delivery of shares of company A on July 1 at a price of 120 rubles.
The new contract has a new delivery price, as the market situation has changed.
Thus, the forward price of the share on April 1 (with delivery on July 1) is equal to the delivery price of the second contract, i.e. 120 rubles. In this case, the delivery price for the first contract remains at RUB 100, but the forward price of a share for delivery on July 1 at that moment is RUB 120.
Source: "mathhelpplanet.com"
Forward Transactions - Differences and Purposes
A forward contract is a binding agreement under which the first party undertakes to deliver an asset (commodity or financial) on a specified date, and the second party undertakes to pay for this asset at a predetermined price. This Agreement does not in itself constitute a transfer of rights to the asset.
The main difference between forwards and transactions with the immediate delivery of an asset and its immediate payment is the delay in the date of execution. When agreeing on the date of execution of a forward contract and a fixed price for it in the future, the parties take into account the current price of the underlying asset that underlies this forward contract.
A forward contract is not always entered into for the purpose of buying or selling an underlying asset. The purpose of forward transactions may be to make a profit on price differences, i.e. banal speculation. Thus, a forward contract, breaking away from the subject of the transaction (from the underlying asset), becomes an independent financial instrument.Transactions in this class of derivatives do not require additional costs. If transactions on this derivative are made with the participation of an intermediary, then overhead and commission costs appear. Forward contracts are traded only in over-the-counter markets, mainly in commodity markets. The most common of which are the gold market and the Brent oil market.
Advantages
- individual character. This option allows you to set any date for the execution of a forward contract, which leads to a reduction in risks
- This tool is not standardized, so any product can act as an underlying asset
- No need for a guarantee
disadvantages
- Significant risks associated with counterparties. One of the parties may not fulfill its obligations
- It is not always possible to make a deal at market prices and on acceptable terms
- The derivative in question is not very convenient for speculative trading
) to the other party (the buyer) or to fulfill an alternative monetary obligation, and the buyer undertakes to accept and pay for this underlying asset, and (or) under the terms of which the parties have counter monetary obligations in the amount depending on the value of the indicator of the underlying asset at the time of fulfillment of obligations, in the manner and within the period or within the period established by the agreement.
A forward contract is a binding forward contract under which the buyer and seller agree to deliver goods of a specified quality and quantity or currency on a specified date in the future. The price of the product, exchange rate and other conditions are fixed at the time of the conclusion of the transaction.
Types of forward contracts
The forward can be settlement or delivery.
- Estimated A (non-deliverable) forward (NDF) does not end with the delivery of the underlying asset.
- delivery forward (DF) ends with the delivery of the underlying asset and full payment on the terms of the deal (contract).
An urgent OTC transaction (a transaction with deferred obligations) is a deliverable forward.
Forward with an open date - a forward contract for which the settlement date (settlement date) is not determined.
Forward asset price- the current price of forward contracts for the respective asset. It is set at the moment of signing the forward contract. Settlements between the parties under the forward contract occur at this price.
see also
Notes
Literature
- John K. Hull Options, Futures and Other Derivatives = Options, Futures and Other Derivatives. - 6th ed. - M .: "Williams", 2007. - S. 1056. - ISBN 0-13-149908-4
- Derivatives: Beginner Course = An Introduction to Derivatives. - M .: "Alpina Publisher", 2009. - 208 p. - (Series "Reuters for financiers"). - ISBN 978-5-9614-1092-1
Links
- Forward contract - an article from the "Economic Dictionary"
Wikimedia Foundation. 2010 .
See what "Forward (contract)" is in other dictionaries:
forward contract- u, h., jur. The contract, which zasvіdchuє goitre of the individual to get (sell) the price of paper, the cost or the price, activate the appointments often on the appointments of the future, fixing the price of such a sale, the hour of laying down such a forward contract ... Ukrainian glossy dictionary
- (eng. Forward "forward") Right Forward forward contract. Term civil law Sport Forward player of the offensive line in some team sports: Forward (football). Forward in ice hockey: Central ... Wikipedia
Economic dictionary
A contract for the supply of goods not yet produced at a fixed price. It is intermediate between a forward contract and a futures contract, differing from the latter in that it ends with the delivery of real goods, and not ... ... Encyclopedic Dictionary of Economics and Law
CONTRACT FOR FUTURE SUPPLY- a contract concluded for the supply of products not yet produced at a fixed price; is an intermediate between a forward contract and a futures contract; unlike the latter, it ultimately ends with the delivery of goods, and not ... ... Big Economic Dictionary
future delivery contract- a contract concluded for the supply of not yet manufactured products at a fixed price. It is intermediate between a forward contract and a futures contract, differing from the latter in that it ends with the delivery of real goods, and not ... ... Dictionary of economic terms
I m. Player of the offensive line of football, hockey, baseball and some other teams; attack. II m. 1. One of the types of transactions in commodity, currency and stock exchanges with an obligation to deliver goods or currency in the future. 2. Document, ... ... Modern explanatory dictionary of the Russian language Efremova
forward contract- (Forward contract) Definition of a forward, forward foreign exchange transactions Information about the definition of a forward, forward foreign exchange transactions Encyclopedia of the investor
Forward contract (forward)- a derivative financial instrument, an agreement between two participants, according to which the seller undertakes to deliver, and the buyer undertakes to pay and receive a certain amount of the underlying asset in the future at a price determined at the time of conclusion ... ... Banking Encyclopedia
- (break forward) Contract for money market, which combines the features of a forward currency contract(forward exchange contract) and a currency option. The forward contract can be prepaid at the previously agreed exchange rate, leaving … Glossary of business terms
Forward contract - a contract by which an urgent foreign exchange deal. Under this transaction, one party (the seller) undertakes to sell to the other (the buyer) a certain amount of foreign currency at a certain point in the future at a price fixed at the time of the conclusion of this transaction (Fig. 18.1). The day when settlements under the transaction will be carried out is called the value date, and the price fixed in the forward contract is called the delivery price.
Forward transactions are concluded, as a rule, in the over-the-counter market. At the same time, the parties agree among themselves all the essential terms of the transaction: the amount of the base currency, the time and method of its delivery, the price of delivery. Such conditions for concluding a forward contract make it unique, which significantly reduces its further liquidity. When concluding a contract, the parties do not bear any financial costs, except in cases where transactions are concluded with the help of intermediaries.
Conclusion
Forward Delivery
currency contract
Delivery of rubles
a) Transaction date b) Value date
Concluding a forward transaction, its parties open their currency positions: the seller - short, the buyer - long. You can close a position by entering into a counter-trade.
In most cases, forward contracts are entered into for the purpose of insurance against foreign exchange risk associated with an unfavorable change in the exchange rate of the base currency in the future. At the same time, the seller, who under the contract is, as a rule, the owner of the base currency, is insured against a fall in its exchange rate, and the buyer, who is interested in receiving real currency, is insured against its growth. However, a forward contract can also be used for speculative purposes, when the goal is to play on changes in exchange rates over time. In this case, it is more appropriate to enter into settlement forward contracts.
Estimated forwards. Settlement forward contract is a contract with the help of which a conversion operation is executed, which is a combination of two transactions: a transaction under a currency forward contract and the fulfillment of obligations to conduct an opposite transaction on the date of its value at the current exchange rate. In practice, this is a forward contract, under which there is no delivery of the base currency, i.e. the seller sells and the buyer buys this currency conditionally. How are payments under this contract made?
As mentioned above, a settlement forward contract is concluded if the parties involved in it pursue purely speculative purposes. Therefore, they are only interested in making a profit, which is transferred by the loser.
winning side. The winning and losing sides are determined by next rule: if the current exchange rate of the base currency on the day of settlement of the forward contract exceeds the delivery price of this currency under the contract, then the difference between these rates, multiplied by the amount of the contract, is paid by the seller under the contract, and vice versa. This rule is based on the following reasoning: if the forward contract were staged, then in order to deliver the currency at it, the seller would have to buy it at the current rate, and if this rate was higher than the delivery price under the contract, then he would would suffer the most losses. The buyer in this case, having received the currency at the delivery price, could sell it at the current rate and thereby make a profit.
Therefore, when concluding a settlement foreign exchange forward contract, the seller on it counts on a depreciation of the base currency, and the buyer - on its growth.
This type of conversion operations was widely developed in Russia until August 1995, when, due to the introduction of the currency corridor, the volatility (fluctuation) of the exchange rate, which had been observed before, sharply decreased. At that time, the base currency was most often the US dollar, and its current rate was the rate set at the auctions on the MICEX. The active use of settlement forwards was due to two reasons:
speculative prevailing in the market;
legislative restrictions (for banks - the lack of a foreign exchange license), due to which many did not have the right to enter into deliverable foreign exchange forward contracts.
Currently, when concluding an estimated foreign exchange forward, either the exchange rate fixed at auctions in SELT or the official exchange rate set by the Central Bank of the Russian Federation can be used as the current rate.
Let us consider the procedure for performing transactions on settlement currency forwards using the following conditional example: on September 10, 1999, bank A and bank B enter into a settlement forward contract between themselves, according to which bank A undertakes on December 1, 1999 to conditionally sell to bank B 100,000 US dollars at exchange rate of 26.25 rubles/dollars. Settlements between banks under this contract are made according to the above-described rule. In quality-
The current exchange rate is based on the official US dollar exchange rate set by the Central Bank of the Russian Federation.
Let us consider the procedure for performing operations on settlement currency forwards using the following conditional example: on September 10, 1999, bank A and bank B enter into a settlement forward contract between themselves, according to which bank A undertakes on December 1, 1999 to conditionally sell to bank B 100,000 US dollars at exchange rate of 26.25 rubles / USD. Settlements between banks under this contract are made according to the rule described above. The official US dollar exchange rate set by the Central Bank of the Russian Federation is used as the current exchange rate.
On December 1, 1999, the Central Bank of the Russian Federation sets the official exchange rate for the US dollar at the level of 26.53 rubles. dollars. Since the current exchange rate is higher than the delivery price under the contract, the losing party is bank A. It transfers money to bank B in the amount of 26.53 - 26.25 rubles. dollars 100,000 = 28,000 rubles, which are the profit of the latter under this contract.
Currency futures. Futures contract - an exchange contract, according to which one party (the seller) undertakes to sell to the other (the buyer) a certain amount of foreign currency at a certain point in the future at a price fixed at the time of the conclusion of this contract. It can be seen from the definition that futures and forward contracts are very similar to each other. However, a futures contract has a number of differences due to the fact that a futures contract is a forward currency transaction concluded on the stock exchange.
The first difference is that when concluding a futures contract, it is not required to agree on all its conditions: the quantity, term and method of supply of the base currency are standard and are determined by the exchange specification. In this regard, futures contracts have high liquidity and there is an active secondary market for them on the issuing exchange. Thanks to this, banks can quite easily close their positions on futures contracts by making a counter-trade with the same number of contracts for which the position was open. Therefore, futures contracts are concluded most often for speculative purposes and, as world practice shows, only 2-5% of futures contracts end with a real supply of currency.
Since the terms of the futures contract are standard, the participants futures deal are traded only for the price at which it will be concluded, as well as for the number of contracts to be concluded.
The second difference is that under a futures contract there is practically no risk of non-execution of the transaction by the counterparty, which is so great when concluding any OTC contract, including a forward one. This is achieved due to the guarantee of its execution by the exchange, which often itself acts as the opposite side for each concluded trace.
Another difference is that when concluding a futures contract, its participants incur costs in the form of a commission, which they pay to the members of the exchange, if they themselves are not.
To open a position in a futures contract, you must deposit a certain amount of cash or securities, called the initial margin. These funds in a certain way provide protection to the exchange, which guarantees its execution.
Another way to protect the exchange from losses in case of non-fulfillment by clients of the contracts they have concluded is the daily revaluation of their open positions, which
which is carried out according to the same rule as in the case of settlement forward execution. Only the settlement price is used as the current rate, which is determined on the basis of supply prices for each type of concluded futures contracts. At the end of each trading day The clearing house of the exchange transfers the amount of winnings from the accounts of the losers to the accounts of the winning bidders. These amounts are called variation margin. Thus, participants in futures trading are aware of their profits or losses on futures contracts on a daily basis. They can either withdraw their profits or have to cover their losses.
If positions on currency futures contracts remain open until the date of their execution, then settlements on them are made in the manner established by the exchange.
In a simplified form, the procedure for carrying out transactions on currency futures can be represented as follows (see Fig. 18.3).
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