AMITY GLOBAL

BUSINESS SCHOOL

Noida

MBA
Forward Market
Mr. Sachin Rohatgi

AMITY GLOBAL
BUSINESS SCHOOL

Forward Market

Noida

A forward contract is an agreement between two

parties giving the buyer an obligation to purchase an
asset (and the seller an obligation to sell an asset) at a
set price at a future point in time.

AMITY GLOBAL
BUSINESS SCHOOL

Forward Market

Noida

Example of forward contract

AMITY GLOBAL
BUSINESS SCHOOL

Forward Market

Noida

In a deliverable forward contract Long will

pay a certain amount at a future date to the short,
who will deliver the underlying asset.
Default- It is the risk that the other party to the
contract will not perform at settlement.

AMITY GLOBAL
BUSINESS SCHOOL

Forward Market

Noida

Types of settlement in forward contract:

1) On expiration
a) Delivery
b) Cash
2) Before expiration
a) Long and short will negotiate before maturity
b) Entering into an offsetting contract
Note: But an offsetting contract may attract credit default
risk.

AMITY GLOBAL
BUSINESS SCHOOL

Forward Market

Noida

The underlying asset in the forward contract can be any thing:

a) Security
b) Currency
c) Commodity

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BUSINESS SCHOOL

Forward Currency Contract

Noida

The Forward currency contract is an agreement, usually with

a bank, to exchange a specific amount of currencies
sometime in the future for a specific ratethe forward
exchange rate.
Purpose of a Forward: Hedging

It is the act of reducing exchange rate risk.

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BUSINESS SCHOOL

Forward rate Premium and Discount

Noida

Forex dealers normally quote forward rates at regular intervals like one
month or three months. For example, dealers normally quote 1-week, 2week, 1,2,3 6 months forward rate.
However, depending on customers requirement, these dealers quote
forward rate on a specific future Such kinds of forwards quotes are known
as broken period quotes.
As forward contracts are OTC contracts, in real life, most of the contracts
would be for a broken periods.

AMITY GLOBAL
BUSINESS SCHOOL

Forward rate Premium and Discount

Noida

Question

On July 14th the following rates are quoted by a bank .

However a corporate customer wants to buy 100,000 USD on
October 21st. The bank has to quote a forward rate for this
date.
USDINR Maturity Date
Bid Rate
Ask Rate
Spot
July 14th
47.0725
47.0745
1 Month
August 14th
135
130
2 Month
September 14th 140
133
3 month
October 14th
160
145
4 months
November 14th 175
155

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BUSINESS SCHOOL

Forward rate Premium and Discount

Noida

Forward quotation can be expressed as percentage premium

or discount to the spot rate.
USD/INR
Spot
1 week
2 weeks
1 month
2 months

Outright quotations USD premium/Discount %

Bid
Ask
Bid
Ask
47.0725
47.0745
47.0750
47.0775
47.0795
47.0835
47.0840
47.0890
47.0900
47.0965

Calculate forward premium /Discount %

% premium/discount = n day forward bid spot bid x 365
x
100
Spot bid
n day of a forward contract

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BUSINESS SCHOOL

Factors affecting forward rates

Noida

As of know we are familiar with bid ask quotations, broken

period quotations, forward rate premium/discount percentage.
Now the next question is what factors are taken into
consideration for quoting a forward rate.
Besides supply, demand factors, the most important factor
which governs the forward point quotation is the prevailing
interest rates in two currencies.
This forward point is also known as forward swap points.

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BUSINESS SCHOOL

Factors affecting forward rates

Noida

Forward Point=
Spot x IQ IB x D/360
100

-----------------------------1+ (IB/100)X(D/360)
Spot = Spot rate
IQ= Interest rate of the quoted currency
IB= Interest rate of the base currency
D= Days between spot and forward rate
360= no. of days
If the forward point is positive, it is added to the spot rate
otherwise, it is subtracted form the spot rate.

AMITY GLOBAL
BUSINESS SCHOOL

Factors affecting forward rates

Noida

A bank wants to quote 6 months forward rate from the

spot .Calculate the forward rate.
Spot= Rs. 66.60/USD
Interest rate in India is 8% per annum
Interest rate in US is 4% per annum.
D= 182 days
360= No. of days in year.

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BUSINESS SCHOOL

Factors affecting forward rates

Noida

Questions:
1. If USDINR rate is 45.17 and USDJPY is 112.35, what would be
JPYINR rate?
a. 2.4872
b. 0.0310
c. 0.40204
d. 32.217
2. Suppose spot USD/INR is 46.75 and 1 year US interest rate is 5%
while it is 11% in India. The 1 year USD/INR forward rate is
a. 42.22
b. 42.29
c. 49.46
d. None of these.

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BUSINESS SCHOOL

Noida

Swap Points
Premium / Discount
Usually, traders do not state the algebraic sign when quoting swap
points. There are two ways to find out whether the swap points are
at a premium or at a discount.
A) Analysis of the interest rates
interest rate base currency < interest rate quote currency= premium
interest rate base currency > interest rate quote currency= discount
B) Bid > Offer = Discount
Bid < Offer = Premium

15

AMITY GLOBAL
BUSINESS SCHOOL

Noida

Q. What is the 6-month outright rate of USD/CHF (184 days)?

USD/CHF spot: 1.5000
Interest rates: USD (base currency) 6 %
CHF (quote currency) 2 %

16

AMITY GLOBAL
BUSINESS SCHOOL

Noida

Q In this Spot rate is given with swap points for different

terms.
GBP/USD
EUR/USD
Spot
1.5930 - 1.5935
1.1805 - 1.1810
1 month
40 39
20 - 21
3 months
120 - 118
35 - 37
12 months
280 - 275
65 70
What are the outright rates of GBP/USD and EUR/USD?

17

AMITY GLOBAL
BUSINESS SCHOOL

Noida

Q In this Spot rate is given with swap points for 3months:

USD/CHF
USD/AUD
Spot rate
1.3757/62
1.5930/35
3-month
125/120
115/110
Swap Points (discount)
What are the forward cross rates for CHF/AUD?

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