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All about the Forward Exchange Rate

  • April 2014
  • Posted By Ninoslav

A forward exchange rate is dependent on actual spot rates which are again variable because of fluctuations in carrying cost. The forwarding rate will define the exact rate which will be used to conclude a financial transaction between two parties at some time in the future. This rate can also be defined as an actual interest rate against a loan repayment.

What are the applications of this rate?
All big corporations like multinational enterprises, overseas banks, financial giants and industry players apply the forward exchange rate to the contract before signing on to the forward contract. Hedging is one important reason for applying these rates and risk reduction is another. A difference in the interest rates between two countries is considered before calculating this rate.

How is forward rate used by the banks?
A forwarding ratio is said to accurately predict the future spot rate according to top financial analysts.

Both future payables as well as most receivables can be efficiently hedged by using forward rates. In fact 90% of big banks and financial institutions today use forwarding contracts with appropriately calculated forward rates in order to reduce all foreign currency risk.

How are these rates calculated?
If you look at any leading bank then you will see that the quotation for a forward contract is delivered for all applicable currencies in certain maturity ratios only. Actually, maturity level goes in a series of numbers like 1,3,6,9 and 12. An exchange ratio basically depends upon the spot exchange value, the domestic rates of interest and the running rates for foreign exchange. You can effectively say that a forward exchange rate will state all what to know about the Forward contract as it defines the transaction value fixed for the future.


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