Forward Quotations (Annualized Forward Margin)

Forward is a transaction where two different currencies are exchanged between accounts on the prefixed future value date.

The exchange of currencies takes place on the prefixed accounts, on the same value date. The Client is protected from adverse movements in future FX rates, but he also does not benefit from favourable movements.

 Foreign Exchange forwards avoid uncertainty and are therefore valid instruments for Clients to mitigate the foreign exchange risk for future transactions denominated in a foreign currency.

 On the trading day of the Forward transaction the Client is obliged to place a collateral deposit at the Bank. If the parties do not agree otherwise, the amount of the deposit is 15% of the forward nominal value.

The minimum size of the transaction is EUR 500.000 or its equivalent in other currency (if the parties do not agree otherwise). (Precondition of the transaction is a valid spot-forward frame agreement.)

Forward points are the number of basis points added to or subtracted from the current spot rate of a currency pair to determine the forward rate for delivery on a specific value date. When points are added to the spot rate this is called a forward premium; when points are subtracted from the spot rate it is a forward discount. The forward rate is based on the difference between the interest rates of the two currencies (currency deals always involve two currencies) and the time until the maturity of the deal.  Forward points are also known as the forward spread.

Forward points are used to calculate the price for both an outright forward contract and a foreign currency swap. Points can be calculated and transactions executed for any date that is a valid business day in both currencies. The most commonly traded forward currencies are the U.S. dollar, the euro, Japanese yen, British pound and Swiss franc.

Forwards are most commonly done for periods of up to one year. Prices for further out dates are available, but liquidity is generally lower. In an outright forward foreign exchange contract, one currency is bought against another for delivery on any date beyond spot. The price is the spot rate plus or minus the forward points to the value date. No money changes hands until the value date.

In a foreign exchange swap, a currency is bought for the near date (usually spot) against another currency, and the same amount is sold back for the forward date. The rate for the forward leg of the swap is the near date rate plus or minus the forward points to the far date. Money changes hands on both value dates.

Discount Spreads

In contrast to the forward spread, a discount spread is the currency forward points that are subtracted from the spot rate, to obtain a forward rate for a currency. In the currency markets, forward spreads, or points, are presented as two-way quotes; that is, they have a bid price and an offer price. In a discount spread, the bid price will be higher than the offer price, while in a premium spread, the bid price will be lower than the offer price.

The forward margin, or forward spread, reflects the difference between the spot rate and the forward rate for a certain commodity or currency. The difference between the two rates can either be a premium or a discount, depending on if the forward rate is above or below the spot rate, respectively.

Forward Margins & Forwards Markets

Foreign exchange markets are global exchanges (notable centers in London, New York, Singapore, Tokyo, Frankfurt, Hong Kong and Sydney), where currencies are traded virtually around the clock. These are large and highly active traded financial markets around the world, with an average daily traded volume of $6.6 trillion in early 2019.

Institutional investors such as banks, multinational corporations, hedge funds and even central banks are active participants in these markets.

Similar to foreign exchange markets, commodities markets attract (and are only accessible to) certain investors, who are highly knowledgeable in the space. Commodities markets can be physical or virtual for raw or primary products. Major commodities by liquidity include crude oil, natural gas, heating oil, sugar, RBOB gasoline, gold, wheat, soybeans, copper, soybean oil, silver, cotton, and cocoa. Investment analysts spend a great deal of time speaking with producers, understanding global macro trends for supply and demand for these products around the world, and even take into account the political climate to assess what their prices will be in the future.

Standardized forward contracts are also referred to as futures contracts. While forward contracts are private agreements between two parties and carry a high counterparty risk, futures contracts have clearing houses that guarantee the transactions, which drastically lowers the probability of default.