The Forward Currency Market Explained

Something you will often heard mentioned with regard to the currency markets is the so-called Forward Currency Market - but just what is this market, and how does it work?

Well, this refers to a market in currencies, but unlike here and now transaction, it refers to those at an agreed date in the future.

If this sounds a little strange or cryptic, then it's not really.

It just means you agree a rate now at which you will exchange the currency on the agreed future date.

If you want to know why you might do this, then the answer is - Certainty. If you have a big exposure to a particular currency and want to reduce the risk of unkind exchange rates, then a future can give you the peace of mind you need that you are protected against any problems (though of course you also limit your possible upside too in some circumstances).

These rates are quoted at premiums or discounts to the current rate, that is to the spot rate.

If the currency is considered to be strengthening against the other, it will be offered at a premium, if it is thought to be weakening then it will be offered at a discount.

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