forward exchange rate

(noun)

the agreed upon price to exchange one currency for another at a future date

Related Terms

Examples of forward exchange rate in the following topics:

  • Introducing Exchange Rates

    • In finance, an exchange rate between two currencies is the rate at which one currency will be exchanged for another.
    • In finance, an exchange rate (also known as a foreign-exchange rate, forex rate, or rate) between two currencies is the rate at which one currency will be exchanged for another.
    • The spot exchange rate refers to the current exchange rate.
    • The forward exchange rate refers to an exchange rate that is quoted and traded today, but for delivery and payment on a specific future date.
    • Explain the concept of a foreign exchange market and an exchange rate

  • International Exchange of Money

    • In finance, an exchange rate (also known as the foreign-exchange rate, forex rate or FX rate) between two currencies is the rate at which one currency will be exchanged for another.
    • For example, an interbank exchange rate of 91 Japanese yen (JPY, ¥) to the United States dollar (US$) means that ¥91 will be exchanged for each US$1 or that US$1 will be exchanged for each ¥91.
    • The spot exchange rate refers to the current exchange rate.
    • The forward exchange rate refers to an exchange rate that is quoted and traded today but for delivery and payment on a specific future date .
    • In finance, an exchange rate (also known as the foreign-exchange rate, forex rate or FX rate) between two currencies is the rate at which one currency will be exchanged for another.

  • Chapter Questions

    • Moreover, you expect the U.S. dollar euro exchange rate to fluctuate 15%.
    • Your company uses the spot exchange rate, which equals $0.9 / 1 CD.
    • Your company enters a three-month forward rate that fixes the exchange rate to $1 / 1 CD
    • Your company decides to use the spot exchange rate, which equals $1 / 11 pesos.
    • Your company enters a forward contract that fixes the exchange rate to $1 / 12 pesos.

  • Spot Rates, Forward Rates, and Cross Rates

    • Spot & forward rates are settlement prices of spot & forward contracts; cross rates are the exchange rate between two unofficial currencies.
    • The settlement price of a forward contract is called a "forward price" or "forward rate. " Depending on the item being traded, spot prices can indicate market expectations of future price movements.
    • In other words, spot rates can be used to calculate forward rates.
    • A cross rate is the currency exchange rate between two currencies, both of which are not the official currencies of the country in which the exchange rate quote is given in.
    • However, if the exchange rate between the euro and the U.S. dollar were quoted in that same newspaper, it would not be considered a cross rate because the quote involves the U.S. official currency.

  • Measuring and Protecting against Economic Exposure

    • You could buy a forward contract for 800 € at a contract price of $1.25 per 1 € to hedge against the exchange rate risk.
    • This example works out nicely because we evenly spaced out the exchange rates, and the middle exchange rate determines the forward contract price.
    • The Forward Price is the exchange rate in the forward contract while the Exchange Rate is the spot exchange rate for a state.
    • If State 2 occurs, the forward rate equals the spot rate, so we neither gain nor lose anything.
    • Consequently, you could hedge against the exchange rate risk by purchasing a forward for 2,000 € and not the amount for the ($\beta$).By deciding to charge the same rent, you can use a forward to protect this amount.

  • Interest Rate Parity Theorem

    • Investors use Interest Rate Parity Theorem to price forward contracts.
    • Thus, the investor locks into a forward contract today for a fixed exchange rate protecting the investor from the exchange rate risk.
    • If the spot U.S. dollar-Malaysian ringgit exchange rate equals $0.3333 per ringgit, then we price a six-month forward contract for $0.3366 per ringgit.
    • At time t, we buy a T-day forward contract to exchange the domestic currency for foreign currency at F.
    • Spot exchange rate is $0.0127 per yen while a one-year forward contract equals $0.0120 per yen.

  • Types of Exchange Hedges: Forward, Money Market, and Future

    • Forwards, money market instruments, and futures are common instruments used to manage exchange risk.
    • In the case of exchanges, when entering a forward contract the buyer hopes or expects that a currency is going to appreciate, while the seller hopes or expects that it will depreciate in near future.
    • A foreign exchange swap consists of two legs: a spot foreign exchange transaction and a forward foreign exchange transaction.These two legs are executed simultaneously for the same quantity, and therefore offset each other.
    • Forward contracts are very similar to futures contracts, except they are not exchange-traded, or defined on standardized assets.
    • The exchange rate of GBP/ USD decreased from 1985 to 1987.

  • International Financial Securities

    • As the business repays the bank in Malaysian ringgits, the international bank can use a forward contract to exchange ringgits for U.S. dollars at a future fixed exchange rate.
    • For instance, a forward-forward swap means a firm and a bank exchange two forward contracts with each other.
    • The key to understanding a forward-forward swap, the exchange involves two cash flows, and a forward contract protects each cash flow.
    • Investors or businessmen can protect themselves from the exchange rate risk by purchasing currency from a bank on the spot market today, and then they use a forward to transfer the same currency back on a future date for a fixed exchange rate.
    • Thus, the bank protects itself from changes in the ruble-dollar exchange rate because the bank pushes the exchange rate risk upon the Russian business.

  • Chapter Questions

    • You believe the Malaysian ringgit-U.S. dollar exchange rate follows a random walk.
    • If the exchange rate equals 3 rm per U.S. dollar yesterday, what is your best forecast for the exchange rate today?
    • Using the approximation, how much should the exchange rate change if the home interest rate is 10%, the foreign interest rate equals 5%, and you plan to invest for 180 days?
    • Foreign interest rate equals 16%, and the exchange rate is appreciating at 4% per year.
    • If the spot exchange rate is S = 0.7 € / $1, estimate the approximate price of a forward contract due in six months.

  • Overview of Derivatives

    • The most common underlying assets include commodities, stocks, bonds, interest rates, and currencies.
    • Products such as swaps, forward rate agreements, exotic options - and other exotic derivatives - are almost always traded in this way.
    • Exchange-traded derivative contracts (ETD) are those derivatives instruments that are traded via specialized derivatives exchanges or other exchanges.
    • A futures contract differs from a forward contract in that the futures contract is a standardized contract written by a clearing house that operates an exchange where the contract can be bought and sold.
    • Usually at the time when the contract is initiated at least one of these series of cash flows is determined by a random or uncertain variable such as an interest rate, foreign exchange rate, equity price or commodity price.