Introduction to the Forward Market

Posted on 2023-04-25

The forward market is a financial market that allows traders to buy or sell a financial instrument at a predetermined price and time in the future. The forward market is similar to the futures market, but the difference is that the contracts in the forward market are customized to meet the needs of the parties involved.

In the forward market, two parties agree to buy or sell a financial asset on a future date, at a price that is determined at the time of the contract. The price is based on the current market price of the asset, plus or minus a premium or discount, which is determined by the prevailing interest rates in the countries of the two currencies involved in the transaction.

The forward market is used by corporations, investors, and financial institutions to hedge against currency risk. For example, a company that expects to receive a payment in a foreign currency in the future can enter into a forward contract to lock in the exchange rate and reduce the risk of currency fluctuations. The forward market is also used by speculators to profit from changes in exchange rates.

The forward market is an over-the-counter (OTC) market, which means that transactions are conducted between two parties without the involvement of an exchange. Because the contracts are customized, there is no standardized contract size, expiration date, or settlement method. This means that the terms of each contract are unique to the parties involved.

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