Foreign exchange forward transactions refer to foreign exchange transactions conducted at an agreed exchange rate on a future agreed date. No matter how the market exchange rate changes at that time, both parties must trade at the agreed exchange rate, usually used to hedge exchange rate risk or make long-term investments.
What is foreign exchange forward trading?
Foreign exchange forward trading is essentially a pre arranged transaction for buying and selling foreign exchange. Managed by foreign exchange brokers and foreign exchange banks engaged in foreign exchange transactions during the operating period. The buyer and seller first sign a sales contract, which specifies the exchange rate, term, and quantity for purchasing foreign exchange, and then deliver at the exchange rate specified in the contract on the agreed date.
Foreign exchange forward trading is an over-the-counter transaction, including forward settlement and sales of foreign exchange business, RMB foreign exchange swap business, etc. The main function of forward foreign exchange trading is to avoid exchange rate risks in international trade, mainly due to the needs of international trade. The purpose is to minimize or avoid potential losses caused by exchange rate fluctuations.
Forward foreign exchange trading mode:
1. Direct forward foreign exchange trading: Refers to trading directly in the forward foreign exchange market and not in other markets.
2. Option based forward foreign exchange transactions: Companies or enterprises usually do not know the exact date of their foreign exchange earnings in advance. Option foreign exchange trading can be conducted with banks, which gives enterprises the right to execute forward contracts within a certain period of time after the trading date.
3. Forward foreign exchange transactions that combine spot and forward transactions.
Why do we need to carry out forward foreign exchange trading?
Firstly, the main reason is the need for enterprises, banks, and investors to mitigate risks.
Secondly, foreign exchange investors seek speculative profits.
Thirdly, foreign exchange transactions conducted by banks to balance forward foreign exchange reserves.
Fourth, forward foreign exchange transactions are made at a certain time in the future, and both parties do not need to pay foreign exchange or local currency immediately. The amount and scale of buying and selling funds are relatively large.
Fifth, forward foreign exchange trading can avoid the risk of exchange rate fluctuations.
Sixth, the reasons for conducting forward foreign exchange transactions. Foreign exchange investors are seeking speculative profits.
It should be noted that foreign exchange forwards are essentially an extension of spot trading in time and the embryonic form of futures trading. Although there are some conceptual similarities between forward foreign exchange trading and futures foreign exchange trading, they are actually different in many aspects.
【 EBC Platform Risk Reminder and Disclaimer 】: There are risks in the market, and investment needs to be cautious. This article does not constitute investment advice.