Home » Eng Finance » F » Forward exchange market

Forward exchange market

A market in which contracts are made to supply currencies at fixed dates in the future at fixed prices. Currencies may be bought and sold in the foreing exchange market either ‘spot‘ or ‘forward

In the former case the transaction takes place immediately, and it is in this market that exchange rates are kept at their managed levels by government intervention. In the forward exchange market, currencies are bought and sold for transacting at some future date, i.e. in three months’ or six months’ time. The difference between the ‘spot’ rate of exchange and the ‘forward’ rate is determined by the rate of interest and the exchange risk; that is, the possibility of appreciation or depreciation of the currencies transacted. Therefore, the size of the premium or discount of forward sterling compared with spot sterling indicates the strength of the market’s expectation of an appreciation or depreciation of sterling and its extent.

Reference: The Penguin Dictionary of Economics, 3rd edt.