instruments in interest-rate, currency and ... - Volksbank AG

What is a forward exchange transaction?A forward exchange transaction is an agreement (obligation) to buy or sell a specific amount of foreigncurrency at a later date. When the agreement is made, the forward rate, the currency, the amount, and thesettlement date are established. The transaction is not settled until the negotiated date.Forward rates normally deviate from spot prices. The reason for this is not the assessment of what the futurespot price will be, but rather exclusively in the interest-rate difference of the currencies.Theoretically, the forward rate for a currency can be identical with the spot price. However, this would bepure chance. If the forward rate exceeds the spot price, one speaks of a forward premium (report, premium,surcharge), or otherwise, of a forward discount (deport, discount). The premiums or discounts for each dateare designated as swap rates.Spot price +/- premium/discount = forward rateDeterminants of a forward exchange transactionn Term: from 3 days to 2 yearsn Currencies: all freely convertible currenciesn Exchange rateApplicationsnFor exportersThe exporter can fix the price or rate to be applied when the foreign currency is expected to be receivedin advance by concluding a forward exchange transaction. Thus, the exporter is protected from the risk ofthe rate falling, from foreign currency devaluation, or appreciation of the euro.nFor importersThe conclusion of a forward exchange transaction offers the importer the possibility of a fixed calculationbasis and security from the risk that the price or rate will increase, a foreign currency will appreciate, or theeuro be devaluated.38