FX Forwards

Question 1

What is an FX Forward

Answer 1

A contract where both counterparties are obligated to exchange currencies on an agreed date, at an agreed rate, for an agreed notional amount

Question 2

What are the benefits of FX Forwards

Answer 2

• Popular hedging tool as they require no upfront payment
• Eliminate exchange rate risk
• They’re traded OTC so contracts can be tailored to the counterparties needs

Question 3

Forwards are conventionally quoted as what kind of dates?

Answer 3

Even/calendar dates (1W, 2W, 2M)

Question 4

What is the formula for Spot

Answer 4

Forwards - Points

Question 5

Formula for Points

Answer 5

Forwards - Spot

Question 6

Formula for Forwards/Outrights

Answer 6

Spot + Points

Question 7

What does a forward rate of 1.4110/1.4112 mean for EURUSD

Answer 7

Bank will buy 1 EUR for $1.4110 and sell 1 EUR for $1.4112

Question 8

When bid/ask points increase left to right, you…

Answer 8

Add the points

Question 9

When bid/ask points decrease left to right, you..

Answer 9

Subtract the points

Question 10

Why are forward rates quoted as points?

Answer 10

• Points tell you about the interest rates of the base and term currency
• More convenient to quote the points rather than the all-in rate
• Market convention

Question 11

If points are being subtracted, the base currency is trading at a…

Answer 11

Discount

Question 12

If points are being added, the base currency is trading at a…

Answer 12

Premium

Question 13

If points are positive –> IR of the base is…

Answer 13

Lower than the IR of the term

Question 14

If points are negative –> IR of the base is…

Answer 14

Higher than the IR of the term