What is the forward exchange market? Basically explain how this market works.

Expert Solution

* In forward exchange market a person promises to buy or sell a specified amount of foreign exchange at a future date but at a predetermined rate. The rate which exist in forward market is known as forward exchange rate.

*A forward market is an over-the-counter marketplace that sets the price of a financial instrument or asset for future delivery.

* Prices in the forward market are interest-rate based. In the foreign exchange market, the forward price is derived from the interest rate differential between the two currencies, which is applied over the period from the transaction date to the settlement date of the contract.

* In spot foreign exchange rate market foreign currencies are delivered on the spot and the rate which exist in spot market is known as spot exchange rate.

* If forward rate is less than the spot rate then foreign currency is said to be at a forward discount.
* On the other hand If forward rate is more than spot rate then foreign currency is said to be at a forward premium..

Forward Discount / Forward Premium = (FR - SR ) / SR

Rahul Sunny answered 1 year ago

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What is the forward exchange market? Basically explain how this market works.

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