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Forward Exchange Rate |
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The forward exchange rate is the rate which appears on a contract to exchange currencies either 30, 60, 90 or 180 days in the future.
For example, a company might sign a contract with a bank to buy EURs for dollars 60 days from now at a predetermined ER. The predetermined rate is called the 60-day forward rate. Forward contracts can be used to lessen exchange rate risk.
Suppose an importer of VWs is expecting a shipment in 60 days. Suppose that upon arrival the importer must pay ˆ1,000,000. The current spot ER is 1.20 $/ˆ. So if the payment were made today it would cost $1,200,000. Now suppose that the importer is afraid of depreciation in the US dollar. While he does not currently have the $1,200,000, he expects to earn more than that in sales over the next two months. If the $ falls in value to, say, 1.3 $/ˆ in 60 days time, how much would it cost the importer to purchase the same VW shipment in dollars?
The answer is that the shipment would still cost ˆ1,000,000, but it would now be worth $1,300,000. The cars would now cost $100,000 more simply because of a slight change in the bvalue of the dollar.
A good way for the importer to protect himself against such a possible loss is to purchase a forward contract to buy ˆ for $ in 60 days. The ER on the forward contract will no doubt be different from the current spot ER. This difference reflects market expectations as to the degree to which currency values will change in the next two months.
Suppose the current 60-day forward ER is 1.25 $/ˆ, reflecting the expectation that the $ value will fall. If the importer purchases a 60-day contract to buy ˆ1,000,000 it will cost him (1,000,000 x 1.25) = $1,250,000. Although this is higher than what it would cost if the exchange were made on the same day, it benefits the importer because he does not have the cash available to make an immediate trade, and the forward contract will protect the importer from an even greater $-depreciation.
When the forward ER is such that a forward trade costs more than a spot trade costs, there is a forward premium. If the forward trade is cheaper than a spot trade, then there is a forward discount.
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| Symbol |
Rate |
| GBP:CHF |
1.747703 |
| GBP:JPY |
155.484239 |
| GBP:USD |
1.638403 |
| NZD:USD |
0.627050 |
| EUR:CAD |
1.545998 |
| EUR:CHF |
1.516857 |
| EUR:GBP |
0.867915 |
| EUR:JPY |
134.947096 |
| EUR:USD |
1.421994 |
| AUD:JPY |
76.394373 |
| AUD:USD |
0.805000 |
| USD:CAD |
1.087204 |
| USD:CHF |
1.066711 |
| USD:JPY |
94.899879 |
| USD:SEK |
7.613010 |
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History