What are futures and forwards?

Future and forward contracts (more commonly referred to as futures and forwards) are contracts that are used by businesses and investors to hedgeagainst risks or speculate. Futures and forwards are examples of derivative assets that derive their values from underlying assets.

What currencies are traded in a forward market?

The most commonly traded currencies in the forward market are the same as on the spot market: EUR/USD, USD/JPY and GBP/USD. A forward market leads to the creation of forward contracts. While forward contracts—like futures contracts —may be used for both hedging and speculation, there are some notable differences between the two.

What is a futures market & how does it work?

The futures market is highly liquid, giving investors the ability to enter and exit whenever they choose to do so. These contracts are frequently used by speculators, who bet on the direction in which an asset’s price will move. They are usually closed out prior to maturity, and delivery usually never happens.

What is a forward price in a foreign exchange market?

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 interest rate forwards, the price is based on the yield curve to maturity.