Tag Currency Contract For Free

At a high level, the ?Contractual Currency? is the currency in which the ?Purchase Price? and the ?Repurchase Price? (but not a close-out amount) is denominated. In addition, the concept of the ?Contractual Currency? is also used in the definition of ?Market Value?.

The mark-to-market value of a forward contract is zero at the time the contract is initiated (time 0). It, however, changes during the life of the contract to reflect changes in spot exchange rates and/or interest rates in either of the currencies involved.

A currency forward is a binding contract in the foreign exchange market that locks in the exchange rate for the purchase or sale of a currency on a future date. A currency forward is essentially a customizable hedging tool that does not involve an upfront margin payment.

The exporter in France and the importer in the US agree upon an exchange rate of 1.30 US dollars for 1 euro that will govern the transaction that is to take place six months from the date the currency forward contract is made between them.

For example, an investor enters into a forward contract to purchase 10 euros at a price of 15 US dollars today. The person selling 10 euros will deliver the assets on the agreed upon date. Forward contracts are usually traded in secondary markets between participating parties and not very common on centralized markets.

Currency futures can also be used to speculate and, by incurring a risk, attempt to profit from rising or falling exchange rates. For example, Peter buys 10 September CME Euro FX Futures for ?1,250,000 (each contract worth ?125,000), at $1.2713 /?. At the end of the day, the futures close at $1.2784 /?.

A simple example of a Currency Option is called a Vanilla Option. This gives you the choice of whether or not to sell one currency and buy another at a specified exchange rate (the protection rate) on a date in the future (the expiry date).