Currency futures and transactions with them. Currency forwards and futures: what's the difference? Risks of forward contracts in Russia

Foreign exchange transactions are operations in which an exchange is carried out. valuable papers in one currency for securities in another currency. In this case, the course is agreed upon in advance for a specific date. There are several types of foreign exchange contracts. The first thing to note is cash or cash transactions. Such operations, also called spots, are performed based on current prices. During these transactions, one currency is purchased for another within two days or immediately.

Types of transactions

In addition to the type of transactions described above, there are others. For example, urgent or forward transactions. In the process of such operations, a monetary unit is acquired or sold at the rate established at the time of conclusion of the agreement. At the same time, when carrying out a forward transaction, the period for which it is concluded is immediately agreed upon, and at the end of which the currency is transferred. Swap transactions represent the purchase of monetary units on spot terms. In this case, the currency is exchanged for another with the obligation to redeem it in the future after a specific agreed period of time.

Urgent currency transactions

The main types of derivatives transactions include forward, currency futures and options. Let's look at them in more detail. A forward is a binding contract entered into outside an exchange. As a rule, such transactions are carried out with the aim of making the actual sale or purchase of the relevant monetary units with future delivery at a time interval agreed upon by the parties. In addition, forwards may be concluded with the intention of hedging, that is, insuring their currency risks.

Forwards can be single, and then they are called outright, or included in various combinations. An example of the second type is swap. It would be useful to emphasize that for forward transactions the rates for buying and selling currencies are fixed. In other words, the forward market is two-sided. It is characterized by low liquidity and closed prices.

Futures contracts

Futures are exchange-traded contracts that have standard characteristics. These include the amount of the contract, as well as the period and procedure for settlement between the parties. Futures are sold exclusively on the exchange. At the same time, it is necessary to comply with certain rules that are the same for all trading participants. It should be noted that when organizing a currency futures, both the seller and the buyer enter into appropriate agreements with the exchange, and settlements for transactions are carried out through the clearinghouse of the trading platform. This procedure guarantees that participants in transactions fulfill all obligations under agreements.

When concluding such transactions, the seller is responsible for the delivery of a standard currency amount, and the buyer of the currency futures must pay it at the rate fixed at the time of the transaction. At the same time, it should be emphasized that one of the key features of futures is the small share of real currency supplies. It is approximately 1-2% of the number of all agreements concluded on the exchange. In most currency transactions of this type, open positions are then closed through counter transactions of similar amounts.

Option trade

The peculiarity of an option is that it is not a firm, or mandatory, forward transaction, as is the case with currency forwards and futures. In practice it looks like this. The buyer of the option has the opportunity to choose either to exercise his right and execute the transaction in accordance with the terms of the option agreement, or to leave the contract without execution. Provided that the buyer of the option nevertheless decides to execute the contract, the seller receives a bonus remuneration, which will remain with him regardless of the fact that the option is exercised.

The advantage of an option compared to forward transactions and futures is the ability to insure against unfavorable market currency exchange rate fluctuations. Additionally, options allow you to effectively take advantage of these changes to make a profit.

Currency and traditional futures

Working with both regular and currency futures involves using general principle: according to the concluded agreement, the sale or purchase of a certain volume of an asset at a set price is carried out at a predetermined time. The main difference between traditional and currency futures is that currency futures are not centrally traded. Similar transactions are concluded on various trading platforms in the United States of America, as well as outside this state. It would be helpful to emphasize that most currency futures are traded on the Chicago Mercantile Exchange.

At the same time, one interesting point should be noted regarding futures. Foreign exchange transactions under such contracts outside of US jurisdiction are also legal, as they are subject to a number of restrictions and certain rules. It is also worth paying attention to the fact that, unlike the spot foreign exchange market, absolutely all currency futures are quoted against the US dollar.

Areas of use of currency futures

The two main uses of currency pair futures are speculation and hedging. The use of currency futures in hedging makes it possible to reduce or completely eliminate the risk caused by sudden changes in exchange rates. The goal of speculation is to obtain the greatest profit by using the difference in exchange rates.

Hedging currency risks with futures

The strategy of using such a tool as hedging when working with currency futures is very popular among traders. And there are a number of reasons for this. First of all, this tool is used to reduce or eliminate risks caused by rapid price changes. And this, in turn, is reflected in sales income. Let's give an example. A trade organization that owns a retail chain in the EU wants to find out the exact amount of profit expressed in US dollars. For this purpose, the company purchases a futures contract, the cost of which is equal to the expected profit of the retail network.

In addition, you should pay attention to the fact that when using hedging, the trader has the opportunity to choose between futures and forward transactions. These instruments differ from each other in a number of characteristics. Thus, forward contracts are not limited by the size of the transaction and time. This feature provides the opportunity to adjust the contract if necessary. At the same time, when working with futures there is no such right. Futures contracts have a fixed size and expiration date.

Payment under a forward transaction is made upon the expiration of its implementation period. Such transactions are settled every day. It should also be noted that using hedging currency risks futures, the trader has the opportunity to re-evaluate his own positions as often as he needs. But when using forwards, there is no such opportunity, and you will have to wait for the expiration of the deal.

Forward transactions forward operation or for short - fwd ) are currency exchange transactions at a pre-agreed rate that are concluded today, but the value date is postponed to a certain date in the future. In this case, the currency, amount, exchange rate and payment date are fixed at the time the transaction is concluded. The duration of forward transactions ranges from 3 days to 5 years, but the most common dates are 1, 3, 6 and 12 months from the date of the transaction.

A forward contract is banking contract, therefore it is not standardized and can be selected for a specific operation. The market for forward transactions with a maturity of up to 6 months in major currencies is quite stable, for a period of more than 6 months it is unstable, while individual transactions can cause strong fluctuations in exchange rates.

The forward rate is composed of the spot rate at the time of the transaction and the premium or discount, i.e. premiums or discounts depending on the interest rates of the interbank market for a given period.

The forward rate is usually different from the spot rate and is determined by the interest rate differential between the two currencies. The forward rate is not a prediction of the future spot rate. If the forward contract is executed before 1 month, then it is considered to be concluded for short dates.

Forward transactions are used in the following cases:

· hedging (insurance) of currency risks;

· speculative operations.

Hedgersattempt to reduce the risk of changes in future prices or interest rates by entering into forward contracts that guarantee the future exchange rate. Hedging does not increase or decrease the expected returns of a market participant, but only changes the risk profile. The principle of hedging is that the movement of foreign exchange market rates is compensated by an equal and opposite movement in the price of the hedging instrument.

The bank can insure the risks of its clients. For example, foreign trade organizations that have payments and receipts in different currencies, using forward contracts, are also able to insure the risk of changes in exchange rates. If a company knows the sales and purchase schedule well, it can hedge the risk of a possible change in the exchange rate in an unfavorable direction, while, knowing the exchange rate in advance, the company is able to calculate its future costs and outline the correct investment and pricing policy. The forward contract market is much more popular abroad than in Russia.

Let's assume that an American importer of German cars must pay for the delivery in EUROs, but will sell the cars in dollars. In this case, the importer must negotiate with the German manufacturer the cost of delivery in EURO and calculate the selling price in US dollars. The importer's risk is that in the time interval between the moment of concluding a contract in EURO and the actual sale of goods in US dollars, the dollar exchange rate may fall. As a result of the depreciation, the importer will need a larger amount in US dollars to recover the contract costs incurred in EURO. However, when entering into a forward contract, the importer will know the exact amount in US dollars required to convert into EURO under the contract, as well as the selling price of the imported goods, taking into account the guaranteed profit.

If, for speculative purposes, the dealer buys EUROS for US dollars for a month at the exchange rate EUR/USD 0.9926, and in a month the spot rate will be equal to EUR/USD 0.9960, then this operation will bring profit to the bank. For example, a foreign exchange dealer buys EUR 10 million at forward rate EUR/USD 0.9926 for a period of 1 month for the purpose of speculation on the exchange rate. A month later, on the value date, the bank will receive EUR 10 million and will pay USD 9,926,000.

If on the value date the spot rate on the market is EUR/USD 0.9960, then the dealer will sell EURO 10 million for dollars and receive USD 9.960.000. As can be seen from this example, as a result of the operation, the bank's profit amounted to USD 34,000 as a result of the dealer believing that the quoted forward rate EUR/USD presumably better than the future spot rate on the value date of the forward contract. However, if the spot rate is EUR/USD 0.9908, then selling EUROs will result in a loss. Opening currency positions in the forward market is also associated with risk, as in the case of other speculative transactions.

Forward outright rate = spot rate ± forward points

Forward outright rate = spot rate ± forward points

Forward points are also called swap points, forward difference or swap difference.

If the forward rate is greater than the spot rate ( FR > SR ), then the currency is quoted “at a premium” if FR< SR , then the currency is quoted “at a discount”.

Amount of forward discounts or premiums by currency

FD (P m ; Dis) = ,

where FD (P m ; Dis ) – forward differential (premium or discount);

FR – forward rate;

SR – spot rate;

t – duration (in days) of the forward contract.

Premiums and discounts on currencies are recalculated on an annual basis so that the return on investing foreign currency in a forward transaction can be compared with the return on investing in money market instruments.

Daily international financial publications such as The Wall Street Journal and Financial Times print current spot rates ( spot rates ) and forward rates ( forward rates ) for 30, 90 and 180 days, this information is also provided by the agency Reuters.

In the forward market, banks also quote the buying and selling rate of a currency and calculate the cross rate accordingly. At the same time, the margin between the currency purchase rate and its sale rate ( AFR - BFR ) is higher for forward transactions and amounts to 0.125-0.25% per annum, while at the spot rate it is 0.08-0.1% per annum.

Forward points are absolute points of a given exchange rate (in units of the quotation currency), by which the spot rate is adjusted during forward transactions, and reflect the difference in interest rates for specific periods between currencies traded on international money markets - the interest differential.

There are two main methods for quoting the forward rate: the method outright and method swap rates.

When quoting using the outright method, banks indicate to clients both the full spot rate and the full forward rate, as well as the time and amount of currency delivery.

In most cases, in the interbank market, the forward rate is quoted using swap rates. This is due to the fact that dealers operate forward margins (i.e. discounts or premiums), expressed in points, which are called swap rates or swap rates. Forward margins have become popular for the following reasons:

· they most often remain unchanged, while spot rates are subject to large fluctuations; thus, fewer changes need to be made to the quotation of premiums and discounts;

· When concluding many transactions, it is necessary to know the size of the forward margin, and not the full forward rate.

There is a rule that:

· a currency with a low interest rate for a given period is quoted forward to a currency with a high interest rate for the same period with a bonus;

· a currency with a high interest rate for a certain period is quoted forward to a currency with a low interest rate for the same period at a discount, or discount.

The main reason for the difference between the spot and forward rates is the difference in interest rates on deposits of the two currencies. Assume that the forward and spot rates of the US dollar to the Japanese yen are USD/JPY 125.0000. Interest rates on dollar deposits are 10%, while the bank rate on yen deposits is only 4% per annum. Investors would then buy US dollars and place them in dollar deposits with higher returns. At the end of the period, investors would be able to convert US dollars back into Japanese yen. At the same time, the income received from the operation would exceed the amount of possible income from placing a deposit in yen at a rate of 4% per annum.

Thus, if we assume that the spot and forward rates are equal, then by calculating the return on deposits in dollars and yen, investors would enter into 2 contracts simultaneously:

1. buying US dollars on spot at the rate of 125.0000

JPY 125.0000 = USD 1.0000

2. forward contract (outright transaction) to sell dollars (that is, buy back yen) at the same rate of 125.0000 on the day the deposit ends in the amount of the deposit and accrued interest:

USD 1008.33 00 = JPY 126.041 0

At the same time, the amount from placement JPY 125,000 on deposit at 4% would be only JPY 125.417.

If in practice equality of rates were observed, then investors would rush to convert currencies and place deposits with higher returns, as a result of which the exchange rate for a given currency would instantly collapse, or interest rates on deposits in another currency would fall. Theoretically, the forward rate is equal to the spot rate only if interest rates in currencies are equal for a given period.

In the example above, the forward rate must actually be higher than the spot rate by some amount to offset the difference in interest rates when making a reverse conversion in the future on forward terms.

There is a rule that:

· a currency with a low interest rate for a given period is quoted forward to a currency with a high interest rate for the same period with a bonus.

· a currency with a high interest rate for a certain period is quoted forward to a currency with a low interest rate for the same period with discount or discount.

To obtain a forward rate based on the current exchange rate, you must add or subtract forward points from the spot rate. Actions are defined according to the scheme shown in Table 8.

Table 8

Forward points	Base currency traded	Forward rate equals
Higher value Goes first High/low	with discount	spot rate minus forward points
Lower value Goes first Low/high	with a bonus	spot rate plus forward points

Thus, the forward rate is calculated by adding the premium or subtracting the discount from the current spot rate. Traders use two formulas to calculate forward points. Formula 1 gives more accurate results. Formula 2 does not give such an accurate result, but makes the calculation simpler.

Formula 1

Forward spot ratex(% currency - % base currency) xnumber of days

points = (% of base currency x number of days) + 360 x 100

Formula 2

Forward spot ratexinterest rate differential xnumber of days

Points = 100 x 360

Here, interest rates on currencies will relate to the period (number of days) for which the forward rate is calculated.

Instead of 360 days, accepted for most currencies as an interest base, for pounds sterling, rubles, Canadian, Singapore dollars, 365/366 days must be taken into account.

If the forward points received are positive, they represent a premium and will be added to the spot rate; in the case of a negative sign, they will be a discount and deducted from the spot rate.

Forward points can always be determined from known interest rates of the participating currencies. Formulas 1 and 2 are applicable for any currency pairs, including pairs with cross rates.

Using these formulas, you can calculate the average forward points for the average outright rate (not taking into account the sides bid and offer ). However, both the spot rate and the outright rate are quoted by banks in the form of a double quote. Forward points are also calculated as bid and offer:

Formula 3

Forward spotbid x(% currencybid- % baseoffer) xnumber of days

points bid = offer x number of days)

Formula 4

Forward spotofferx(% currencyoffer- % basebid) xnumber of days

offer points = 360 x 100 + (% of base currency bid x number of days)

Example of calculating 3-month forward points bid and offer for the US dollar to EURO exchange rate.

Quote EURO/USD 1.0531 – 1.0536, or 31/36.

3-month rates on deposits in US dollars and EUROs are (Table 9):

Table 9

		OFFER

0.0026

Forward 1.0531 x (5 - 4)* x_ 90 days

bid points = 360 x 100 + (4 x 90)

0.0078

Forward 1.0536 x (6 - 3)* x_ 90 days

offer points = 360 x 100 + (3 x 90)

The forward pips quoted by the bank dealer would be as follows:

BID OFFER

EUR/USD sprat rate 1.0531 1.0536

3 months forward p-you 26 78

3-month course outright 1.05 57 1.0 614

* the meaning of this action is to calculate the cost of lost opportunity, that is, by concluding a deal, the dealer loses the opportunity to place the same funds on deposit

To find the forward rate, the outright dealer added forward points and spot quotes, respectively, on the sides bid and offer. On the bid side , just as with the spot rate quote, the bank quoting the forward outright rate will buy the base currency (in this case the EURO) against US dollars for future delivery. On the side offer the bank will sell the base currency on forward terms. Calculations carried out by bank dealers are carried out automatically using special software according to the algorithms given above.

The amount of margin (spread) between the parties bid and offer side When quoting forward points and the outright rate, the outright depends on the same factors as when quoting the spot rate, that is, on the nature of the counterparty, the market situation, the size of the amount, etc.

For the foreign exchange dealer operating in international markets, Reuters provides information on the current values ​​of forward pips rates for standard periods. If a dealer of one bank requests a forward quote from another bank, the latter will quote him forward points, for example, 26/78 or 199/198. Quoting forward points is much more convenient, since they depend on interest rate differentials and change less frequently than spot rates.

To make it easier to find the forward rate, dealers use the following rule:

· if forward points increase from left to right (quote bid less quotes offer ) – then to find the outright rate, forward points are added to the spot rate;

· if forward points decrease from left to right (side bid more offer side ), then to find the outright rate, forward points are subtracted from the spot rate.

In the Reuters information pages, forward points decreasing from left to right are additionally provided with a negative sign for ease of perception, indicating that they must be subtracted from the spot rate to obtain the forward rate.

For example, a foreign exchange dealer needs to quote the 6-month outright rate of the pound sterling to the US dollar. Since interest rates on sterling are higher than on US dollars, the pound will be quoted at a discount to the dollar (or you could say that the dollar will be quoted at a premium to the pound). Dealer uses Reuters page FWDW , where for a period of 6 months (6M) finds the following quote for 6-month forward points: -199/-198. Current spot rate GBP/USD is 1.5603/13. Since forward points decrease from left to right, they must be subtracted from the spot rate:

GBP/USD spot 1.5603 / 1.5613

6 mth fwd points - 199 - 198

6 mth GBP/USD outright 1.5404 1.5415

Sometimes forward points in the same bilateral quote are both subtracted and added: - 1.0/+1.0, which means “around parity” ( round par .). This occurs with very little interest rate differential. So, on the screen you can see the quote -1.0/+1.0. In this case, the trader says: “One off parity.” Parity is zero. The quote – 3.0/+3.0 is read as “three from parity”. There is also a quote par /3 or 3/ par . Similar arithmetic operations are applied to quotes to obtain the forward rate.

Size of forward points for broken dates ( broken dates ) can be calculated using the formula and also taken from the pages of Reuters in the form of ready-made forward points. Dealers entering into a broken date forward transaction should be aware that the market for such transactions is less liquid than the market for standard maturity transactions and it may be difficult to find a counterparty to close the contract.

Assume that the forward points for standard straight-dated periods are:

2 months 31 – 47

3 months 55 – 74

The difference between forward points for 2 and 3 months is:

For the bid side 55 – 31 = 24

For the offer side 74 – 47 = 27

For one day, the forward points of the 2nd month (the period between the 2nd and 3rd month) are respectively:

For the bid side 24/30 = 0.8

For the offer side 27/30 = 0.9

For 10 days of the second month, forward points will be:

bid offer

0.8 x 10 = 8 0.9 x 10 = 9

The forward points sought for a period of 2 months and 10 days would be:

31 4 7

+8 +9

39 – 5 6

Swap rates, which are quoted in banking information systems, are given only for full months or for so-called straight dates. If the spot value date coincides with the last day of the month, then the “end of month” rule applies, in which all forward transactions at a similar spot rate have a value date on the last day of the month. For example, if a 6-month forward transaction is entered into on February 26, then the corresponding spot date will be February 28, i.e. the end of the month. Therefore, this forward transaction must be settled on 31 August rather than 28 August. All other dates that do not follow the end-of-month rule are called broken dates. In this case, swap points are calculated by converting the difference in swap points for two direct dates into a daily rate.

The positive aspects of carrying out forward operations include the fact that they provide great opportunities for maneuver, especially if the forward operation is not directed against specific assets or liabilities. While spot transactions must be settled almost immediately, simple forward contracts allow time for liquidity controls and adjustments to be made.

The forward market is also important for financial managers of companies because they can determine the value of imports or exports in local currency long before the payment date. When a financial manager enters into a forward contract with a bank, his main task is not to be left with an open currency position if for some reason the goods or payment are not received. Professional dealers, having unlimited market information, have more room for maneuver than their commercial counterparts. However, there are also significant risks associated with forward transactions. The longer the term of the forward contract, the greater the risk that the counterparty's creditworthiness may deteriorate. The probability of cancellation of a spot contract is much lower than that of a forward contract. At the same time, the most “unsuccessful” option is one in which one of the parties fulfills the terms of the transaction, while the other does not. This can result in the loss of a significant amount or a costly lawsuit.

In Russia, the forward market is much less developed than the spot market, which is explained by the market's predominant orientation towards short-term transactions.

Exchange futures currency transactions include options and futures contracts. However, commercial banks are now also trading option contracts, and such trading is especially widespread in Switzerland.

a sale and purchase agreement in which two parties agree to exchange assets at a fixed time and at a fixed price

General characteristics of a forward contract, distinctive features of forward contracts, examples of a forward contract, types of forwards, forward foreign exchange contract, price of a forward contract, forward contract market, Russian forward

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Forward contract - definition

A forward contract is a document that obliges two people to sell or buy securities or funds at an agreed time on agreed terms in later life. Usually the contracts are negotiated outside, but it's still a solid deal.

Forward on the example of a farmer and a confectionery shop

forward - This derivative financial instrument. Thanks to it, one party undertakes to transfer (the goods) to the other party within a period specified in the contract or to fulfill another alternative monetary obligation. undertakes to accept and pay for this product. Thus, under the terms of the agreement, the parties have counter monetary obligations. The amount of these obligations depends on the value of the base indicator at the time of fulfillment of obligations, in the order of time or within the time period established by the contract.

forward is mandatory urgent . In accordance with it, the buyer agrees to a predetermined quality and quantity. At a specific date in the future. The price of the product and other conditions are fixed at the time of conclusion of the transaction.

a forward contract is predetermined execution of a currency exchange contract at a certain agreed upon future date, taking into account the difference in interest rates between specified currencies.

forward is an agreement (derivative financial instrument) under which one party (the seller) undertakes to transfer a product (the underlying asset) to the other party (the buyer) or to fulfill an alternative monetary obligation, within a period specified in the contract, or to fulfill an alternative monetary obligation, and the buyer undertakes to accept and pay for this underlying asset, and (or) under the terms of which the parties have counter monetary obligations in an amount depending on the value of the underlying asset at the time of fulfillment of obligations, in the manner and within the period or within the period established by the agreement.

forward contract - This a form of urgent, quick settlements made no more than two business days after the conclusion of the transaction. Typically, forward transactions are concluded, carried out, by commercial and industrial enterprises in order to avoid possible losses from fluctuations, changes in prices, and exchange rates.

forward contract - This an agreement for the purchase and sale (delivery) of an asset at a certain time in the future. This is a fixed-term agreement with mandatory execution by each of the parties to the agreement, i.e. solid deal.

forward is

a bilateral agreement in a standard (typical) form, which certifies a person’s obligation to purchase (sell) an underlying asset at a certain time under certain conditions in the future with the fixation of prices for such

at the time of entering into a forward contract.

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Forward Contract Examples

Here's an example of a forward:

Person A entered into a forward contract with person B. They arranged on July 1 for the delivery of shares of Svet JSC on October 1 at a price of 100 per share. In accordance with the concluded contract, on October 1, Person A will transfer 1,000 shares to Person B. While person B will pay 100 thousand rubles for them. The conclusion of the contract itself does not require anything from the parties in connection with the execution of the transaction.

A forward, as a rule, is concluded for the purpose of making a purchase or sale on mutually beneficial terms. Plus insurance for the supplier or buyer against possible unfavorable outcome of the transaction or price changes.

Thus, by concluding a deal, person B insured himself against an increase in the market value of the securities, since the contract contains a fixed price. And it does not depend on increases in the price of securities. Person A, in turn, insured himself against a possible fall in the stock price, since the price was specified in the contract.

Let's look at an example of hedging using a forward arrangement. The importer plans to purchase goods in three months for . To do this, he needs currency. To prevent this, he decides to buy the currency with a three-month dollar contract. The importer goes to the bank to make a deal. There he is offered three-month contracts at the rate of $1 for 30 rubles. The importer enters into a contract with the bank, undertaking to buy dollars. Three months pass, the importer pays 30 rubles under the contract. for one dollar and receives the contract amount. At that moment, the dollar exchange rate on the market amounted to 31 rubles. However, under the contract, the importer receives a dollar at 30 rubles. And after three months, the dollar exchange rate is 29 rubles. on the market, but the importer is still obliged to fulfill the terms of the contract and buy a dollar for 30 rubles. It turns out that the forward agreement insured the importer against possible unfavorable conditions, but also did not allow him to take advantage of a situation that was favorable to him.

What if instead of the importer from the previous example we substitute ? He should receive it in three months. Then, the exporter plans to convert this revenue into rubles. In order not to take risks, he hedges the future sale of dollars by entering into a contract. The exporter enters into a contract with the bank, under which he decides to sell dollars to the bank at a price of 30 rubles. per dollar. Three months later, the exporter gives dollars under the contract at a price of 30 rubles. per dollar and receives the contract amount. The market conditions at this moment can be anything. Let's assume that the dollar exchange rate was 29 rubles. But according to the contract, the exporter still sells the dollar for 30 rubles. Let the dollar exchange rate in three months be equal to 31 rubles, but the exporter is obliged to fulfill the terms of the transaction and sell the dollar for 30 rubles. It turns out that the conclusion of the contract insured the exporter against unfavorable market conditions, but did not allow him to take advantage of the favorable situation.

Now let's try to imagine a speculator instead of an importer. He predicts that in three months the dollar exchange rate will be 31 rubles. In this regard, the speculator buys a contract where 1 dollar costs 30 rubles. After three months, the dollar exchange rate on the market is 31 rubles. A speculator buys a dollar under a contract for 30 rubles. and immediately sells it on the market for 31 rubles, while winning one ruble on one dollar. If the dollar exchange rate by this moment has fallen to 29 rubles, then the speculator loses 1 ruble. And he is obliged to fulfill a forward contract, according to which he must buy a dollar for 30 rubles, and the speculator can now sell it only for 29 rubles. In this example, a general pattern arises for futures contracts, namely: if they are bullish, then they buy the contract and benefit from the rise in price, but at the same time lose from its fall.

Let's say that in the previous example, the speculator expects the dollar to fall in three months to 29 rubles. Then he will play short. In this case, the speculator sells the contract for 30 rubles. After three months, the dollar costs 29 rubles. And the speculator buys it on the market for 29 rubles. Then he delivers it forward for 30 rubles, winning a ruble. Let the dollar at that moment cost 31 rubles. To fulfill the contract, the speculator is forced to buy a dollar on the market for 31 rubles. and deliver it under contract for 30 rubles. In this case, his loss is 1 ruble. In this example, we can see a general pattern when concluding futures contracts, namely: if they play short, they sell the contract and benefit from , but lose from its growth.

Forward contract positions

Forward contracts are concluded for the purpose of playing with the exchange rate value of the selected asset. The two sides in this case take short and long positions.

A short position is when more currency is sold than bought. Thus, the liabilities on the asset sold exceed the claims on the acquired asset. That is, a short position is occupied by the seller of assets.

Raising game is when the amount of currency bought is greater than the amount sold. Thus, the requirements for the acquired currency exceed the obligations for the sold currency. That is, the long position is occupied by the buyer of the currency.

A person taking a short position is relying on a decrease in the market price of the asset. And the person who keeps the bull game relies on further growth the market price of the asset underlying the contract.

Differences between forward contracts

Forwards are usually concluded outside the exchange. Sometimes, for the convenience of the parties, they themselves develop standard contracts for transactions on these exchanges. This is typical for this type of contract. Forwards have their own specifics and features that distinguish them from other contracts.

Distinctive features of forwards:

They are binding and cannot be reversed;

They are drawn up taking into account all the requirements of the parties and are not the subject of mandatory reporting;

When drawing up a contract, the following must be determined: the date, time and place of delivery of goods, the value of assets, the quality of the goods supplied, the price per unit of goods.

Types of forwards

There are three main types of forward:

A settled forward contract does not end with just delivery of the asset;

A deliverable forward contract ends with delivery of the asset and the complete transaction;

A foreign exchange forward consists of exchanging currencies at a fixed rate.

Forward with open date- a forward contract where the date of settlement between the buyer and the supplier is not determined.

Forward asset price- forward price for the asset. It is established at the very moment of conclusion of the agreement between the parties. Settlements between the parties to the transaction take place at a fixed price.

Settlement forward contract

Settlement forward contract- the obligation of one party to pay the other party the difference that arises between the price of the goods at the time of conclusion and at the time of execution of the contract. The benefit in a settlement forward contract depends entirely on . This type of agreement is considered a “transaction for difference” since during execution there is neither the provision of any service nor the movement of goods. As a result of the settlement agreement, a sum can be obtained, the size and fact of which depends on price fluctuations in the market.

Delivery forward contract

Deliverable forward contract- an agreement according to which a transaction between two parties ends with the delivery of goods and full payment by the buyer, on his terms. Often over-the-counter futures transactions are called staged contracts. It plays an important role in hedging. That is, it helps to neutralize various risks in changes in product prices. This type of forward contract implies the actual delivery of the agreed goods within the agreed time frame. Based on this, the purpose of the delivery forward is to fix the price at which the goods will be delivered.

Foreign exchangeforward is a contractual agreement between two parties (a bank and a non-bank client, or two banks). Having once concluded a contract, the client cannot refuse it or change its terms without the consent of the counterparty bank. That is, these operations are carried out on and on parts of the client market.

Foreign exchange forward transactions are transactions in which the parties agree on the delivery of foreign currency over time. That is, the deal is concluded today, and the value date (execution of the contract) will occur after a certain period in the future. Two features of urgent foreign exchange transactions follow from this definition.

The history of the Russian forward

Abroad, the forward contract market is much more popular than in Russia. In our country, some researchers do not take this kind of contracts seriously. And they claim that these are just types of games or bets. However, such contracts are widely discussed and studied by lawyers. They see them as an independent type of agreement in both stock exchange and banking practice.

The relevance of such transactions has been discussed many times since the 90s of the 20th century. It was then that banks entered into the first settlement forwards. Especially after 1998. Then the massive failure to fulfill such transactions was not forced. Which led to huge losses in the largest Russian banks. And also a large number of Western banks that have closed their doors to the Russian Federation for many years.

The foundations of the regulatory framework for forward transactions were laid before the 1998 crisis. Two regulations:

Instructions of the Bank of Russia dated May 22, 1996 No. 41 “On establishing limits on open currency positions and monitoring their compliance by authorized banks Russian Federation" It established the procedure for banks to carry out transactions with forward contracts;

Bank of the Russian Federation

Another document regulating the banking market was the Regulation of the Bank of the Russian Federation dated March 21, 1997 N 55 “On the procedure for maintaining accounting transactions of purchase and sale of foreign currency, precious and securities in credit institutions.” It established the accounting procedure and gave a clear definition of a forward transaction. An urgent transaction was understood as a transaction, its execution is carried out by the parties no earlier than the third working day after the day of conclusion.”

Our Moscow banks were the partners of foreign banks in forward transactions. The exchange rate of contracts was determined based on the parameters established by the Bank of the Russian Federation and did not exceed 6.50 rubles. for 1 US dollar.

It may seem that Moscow banks were playing a win-win game with exchange rates. They had no doubts about the inviolability of the parameters that were established by the money. They did not ask why foreign banks fix the future exchange rate for purchasing dollars by concluding forward transactions.

However, in March - April 1998, after the Bank of Russia published the country's financial year for 1997, foreign banks began to withdraw from Russia. This happened because the minus on the current account is the main increase in investment risk on an independent basis.

On July 10, 2001, Decree of the Government of the Russian Federation No. 910 was issued - “On the Russian Socio-Economic Development Program for the medium term (2002 - 2004).” The priority task for the Government of the Russian Federation was the development of investment institutions, including the formation of the market in the Russian Federation. It was intended to make appropriate changes to the Civil Code of the Russian Federation to abolish legal norms allowing the recognition of forward types of transactions as bets.

Risks of forward contracts in Russia

The risky nature of these transactions is often cited as justification for classifying forwards as games and bets. It is logical that the basis of the game is a risk of a different order. With a fair degree of certainty, we can say that the risk in games and bets is due to excitement. An insurance contract is also recognized as risky, but the nature of the risk underlying such a contract is different than in games and bets.

Forward as a bet

Forward contracts are also risky transactions, however, the risk of changes in the price of an asset is a business risk inherent in the activity. And when playing pretend, a risk is created. This was indirectly pointed out by the Constitutional Court of the Russian Federation on December 16, 2002 N 282-O: “The refusal to provide judicial protection of claims from relevant transactions may in a number of cases be in conflict with the principle of freedom of entrepreneurial activity, the principle of freedom of contracts enshrined in Art. 421 Civil RF". The basis of a forward contract is the extraction of profit as the main goal of business activity with risk insurance.

The latest legislative decision has ensured that forward transactions are legally binding, provided that at least one of the parties is. It has to carry out banking operations, or professional activities in the market.

This is just the first step in improvement. legal regulation similar transactions, which should be followed by specific measures aimed at developing this.

Main characteristics of a forward contract

A forward is an agreement between parties for the future delivery of an asset. The terms of the transaction are negotiated at the very moment of conclusion of the agreement. The contract is executed only in accordance with these conditions and within the prescribed time frame.

According to its characteristics, the forward refers to an individual transaction. Therefore, such contracts are not developed or are poorly developed. The exception is the forward foreign exchange market.

When concluding a contract, the parties agree on the price at which the goods will be sold. This price of the product is called the delivery price. It remains fixed during the entire duration of the forward.

In connection with the forward contract, the concept of forward price also arises. Forward price - This, the delivery price specified in the contract that has been concluded at that point in time.

Forward price

Forward transactions:

Aimed at the real transfer of rights and obligations regarding the goods. It is subject to agreement. Unlike other transactions, the parties, when concluding a forward contract, provide for the actual sale of goods by the seller and their acquisition by the buyer;

The transfer of the goods and the transfer of ownership of it is expected in the future, within the period specified in the contract.

Forward transactions

Based on the characteristics defined above, forwards have a special form of delivery arrangement. The purchase of goods under a forward contract occurs without prior inspection of the goods. Because:

Often, the goods have not been manufactured at the time of signing the contract, and it is impossible to provide it for inspection;

The goods at the time of conclusion of the agreement are still the property of the seller and have not been sent to the exchange warehouse for inspection. Otherwise, due to long delivery times, the seller would have to pay the exchange a tidy sum for storing the goods. However, if samples of goods are available, interested buyers can inspect them.

A forward contract is an excellent opportunity to insure profits. At the time of conclusion of the agreement, pre-agreed conditions are fixed, such as delivery time, quantity of goods, and its price. This type of risk insurance is called hedging.

Forward value- the result of the participants’ assessment of all factors influencing the market and the prospects for further developments.

At the time of concluding forward contracts, the parties can provide for the fulfillment of obligations. Establish measures that will force a possible debtor to fulfill his obligations in a timely manner. Such measures in exchange practice are usually a deposit or.

Features of derivative securities

Derivative securities have the following features:

The value is based on the price of the underlying exchange asset. Other securities may also act as such;

The form of circulation is similar to the circulation of basic securities;

The introduction and distribution of derivative financial instruments on the Russian market is associated with solving the problem of placement Money. And also by choosing a strategy that would ensure not only income generation, but also insurance against risks associated with unfavorable price changes.

Differences in types of contracts

Below is a table by which you can understand the difference between forward and.

Forward contract

Parties to the agreement.

Depends on the exchange asset, usually quite high. Liquidation comes in two forms: physical delivery or reverse transaction.

Often limited. Cash payment instead of delivery.

The frequency of delivery of the underlying asset.

Contractual procedure.

Minimal or absent under a contract registered by the exchange.

There are all types of risks, the level of which depends, among other things, on the credit rating of counterparties.

Regulation.

Regulated by the relevant exchange.

Low-adjustable.

Determined at the time of its expiration

Calculation of profit or loss

Calculation is carried out daily based on the results of past trades.

What type of deal is the most profitable? Forward contracts provide a simple and convenient means of fixing price rates. Futures are attractive because they provide the opportunity to make a profit.

One of the disadvantages of futures is price distortion. It is the result of the activities of sellers who do not charge commission money from clients, but trade at their own expense.

Such stock market specialists monitor price changes and, thanks to their intuition, partially intercept customer orders.

A futures contract has time flexibility, unlike a forward contract. Futures can be executed at any time, while changing the date of a forward can only happen with the agreement of the bank and entail additional costs.

Now let's turn to the characteristics of options and forward contracts.

Forward contract

An agreement between the seller of the option and the buyer of the option (owner of the option). The seller of the option may be a bank.

Agreement between the bank and the buyer.

The option is negotiated individually between the bank and the buyer or bought and sold on the exchange.

A forward contract is negotiated individually between the bank and the buyer.

An option is a conditional future sale or purchase of a certain amount of one type of currency in exchange for another type of currency.

A forward contract is an unrestricted sale or purchase of a certain amount of one type of currency in exchange for another type of currency.

The exchange rate is determined (fixed) in the option agreement.

The exchange rate is determined (fixed) in the contract. The rate is based on the spot rate of the currency plus a discount or minus resulting from the difference between the two currencies.

An option must be purchased from the option seller at a certain price (known as the premium).

The forward contract is not purchased. The bank's profit is derived from the difference between its prices for buying and selling currencies.

An option can be exercised by its owner at exactly the specified date or any time before the specified period (depending on the term of the option). Once the option expires, it becomes invalid.

The forward will commence on the exact date specified or any time between two specified dates in the future depending on the terms of the contract. The contract must begin to operate within the specified period (unless a special agreement on it is concluded with the bank).

The option is exercised by the owner by notifying the option seller.

Settlements under a forward contract are carried out by both parties.

Deal Features

Operation characteristics:

Currency exchange (settlement) will occur no earlier than 3 business days after the conclusion of the contract;

The future exchange rate is fixed at the conclusion of the transaction;

The payment term is fixed in the contract;

Liquidity issues are not discussed before the payment is due.

The bank that has entered into a forward transaction undertakes to deliver the currency at a predetermined rate on the date specified in the contract, regardless of the actual market change in the rate at that moment.

Every forward contract includes three main elements:

An agreement in the form of an obligation to buy or sell a specified amount of one currency in exchange for another;

The exchange rate is fixed at the time the contract is concluded;

The contract is executed at an agreed time in the future.

For clients of commercial banks, this type of transaction allows them to more accurately calculate receipts and payments for the future, and insure themselves in the event of an increase or decrease in the exchange rate of the relevant foreign currency in relation to.

Each forward contract is prepared taking into account the specifics of the seller and the buyer. The individual nature of the agreement has certain disadvantages:

The need for time to agree on the terms of the contract;

Forward contracts on interest rates;

Options contracts.

By law, any transaction carried out in France can only be concluded by an officially recognized market participant. Failure to comply with this rule will result in the cancellation of the transaction. If there is a dispute between the parties to the contract and one of the parties fails to fulfill the obligations, this party bears responsibility and cannot evade responsibility.

Dispute between parties to the agreement

The courts have been denied protection from conflicts between parties for over a hundred years. But they tried to formulate specific conditions under which transactions were still subject to protection in court. However, it was not until 1986 that the Financial Services Act was passed, providing legal protection to parties provided that both or at least one of the parties enters into the transaction as an entrepreneur for the purpose of “ensuring income or avoiding loss.”

An important example of the legal regulation of games and betting was the German Civil Code. It read: “No obligation arises from a game or bet. What was executed on the basis of a game or bet cannot be claimed back, since there was no obligation. These rules also apply to an agreement under which the party that lost the game or bet, in order to pay the debt, assumes an obligation towards the winning party, in particular, makes an acknowledgment of the debt.”

The European legislator makes the protection of claims arising from settlement forwards conditional on the special status of their participants:

Assuming the professional preparedness of the participants to conclude such transactions;

Excluding possible damage to public interests;

Providing special control over their activities by the authorities, and in the presence of a “weak” party - also special guarantees of its rights.

That is, when deciding on the issue of providing judicial protection to settlement forwards, certain types of games and betting itself, the role that this agreement plays in specific circumstances was considered important.

Forward contract as a type of game

As can be seen from the example of other countries, forwards in our country are not very reliable and advanced. Of course, with experience will come new laws and regulations that can regulate the forward system. But for now, this system is more like small child. He has already learned to crawl, but still cannot stand firmly on his feet. Let's hope that over time Russia will catch up, or even surpass its “big brothers.”

Sources and links

Sources of texts, pictures, videos

wikipedia.org - free encyclopedia Wikipedia

superwork.org - investor's ABC's

theomniguild.com - finance and investments

investments.academic.ru - dictionaries and encyclopedias

dbsinternational.ca - consulting service provider

Links to Internet services

abc.informbureau.com - Economic Dictionary

valyutnaya.poziciya.banka - Bank currency position

pravo.vuzlib.org - Examples of forward contracts

justicemaker.ru - Coursework

market-pages.ru - Information business portal

fuforioprin.forkont - Forward characteristics

rudocs.exdat - Theses

FXstart .net - Encyclopedia of a stock trader

dic.academic.ru - dictionaries and encyclopedias

There are a huge number of financial instruments in the economy. Let's talk about one of them. A forward contract is essentially an agreement entered into between two parties that details the purchase or sale of a specific quantity of an underlying asset at a clearly stated price, with a timeframe for the implementation of the agreement in the future, inclusive. Signing this type of agreement means that one of the parties to the transaction, the seller, undertakes to deliver a specific amount of underlying assets on the date specified in the agreement, but which is distant from the date of signing the agreement. The other party, the buyer, undertakes to accept delivery within the agreed time frame.

Main characteristics of contracts

The date on which the forward contract is signed is called the agreement date. The date determined by the parties as the time of implementation of the agreement is called the payment or settlement date. The time period from the moment of signing the contract to the moment of settlement is called forward. Agreements can be concluded for any period and amount of funds, everything depends solely on the needs of each party. The most effective are considered to be forward transactions, the cost of which starts from $5 million. Within the international derivatives market, contract amounts vary from 1 to 100 million. Each of the parameters - the date of signing the contract and the settlement date, the transaction amount and the volume of the underlying asset - are determined purely on an individual basis. There are no restrictions in this matter.

Risk hedging

Thanks to the preliminary determination of the contract value, it is possible to hedge risks. By establishing the value of a financial instrument, both the seller and the buyer are completely freed for the forward period from the risk of changes in market value. The transaction does not provide the opportunity to acquire certain benefits. The seller does not receive a material advantage in the event of an increase in the value of an asset on the market, and the seller does not receive a material advantage as a result of a fall in the same asset. If this situation occurs, then one of the parties may refuse its obligations, as it gets the opportunity to complete a transaction on more favorable terms. The contracts are defined as firm forward contracts. It is the obligation to fulfill one’s part of the agreement that underlies them; without this feature, the instrument would cease to exist as a direction for hedging risks.

Story

Forward transactions first appeared about 400 years ago. They had the format of agreements on the sale of the future harvest. Over the past few decades, contracts have become especially popular, the main subject of which is financial instruments. The financial forward market is essentially an over-the-counter market. Exchange trading unacceptable due to the individuality of the terms of the agreement. Formally, any business entity can participate in contract trading. In practice, the choice of partner is carried out very carefully and carefully, as it reduces the risk of delivery failure.

Forward market participants

For the most part, the parties to the agreements are large banks and pension funds, insurance companies that have a positive reputation. Certain categories of transactions are subject to certain restrictions. An example is forward credit transactions, in which one party must have an open line of credit with the company that is the other party to the arrangement. Private entrepreneurs can also act as bidders, but they must have a strong material base and be active participants in global financial life.

Who determines the mood in the forward market?

The most active players in the forward market are banks. They actively use a forward contract for the purchase of currency to hedge their own risks associated with changes in the value of financial instruments. Financial institutions offer this type of arrangement for a similar purpose to their clients. Thanks to wide financial opportunities in terms of distribution and attraction of material resources, banks, unlike other trading participants, avoid real losses even if market prices do not play into their hands. By concluding two opposite contracts, the bank can easily cover a loss on one transaction with a profit on another. Banks can also act as intermediaries, who help find market participants with opposing desires.

Specifics of contract trading

Trading forward contracts does not have a clear organized structure. Low competition in this segment of activity gives banks certain advantages in the form of the opportunity to impose their terms of partnership on participants in agreements. The profit that forward foreign exchange contracts can generate depends in large part on the ability to predict the future value of the asset that forms the basis of the agreement.

Banks benefit here because they have access to a huge amount of information and they employ professional analysts. This leads to the formation of a huge and active market of offers, the over-the-counter stock market. Forward contracts can be signed not only for a real amount of funds, but also for a conditional one. In the latter situation, after the implementation of the agreement, in the event of a difference in the contract and market value of the underlying asset, one of the parties pays the other only the price difference. There is no actual exchange of currencies, shares, securities and other financial instruments.

Pros of contracts

A forward contract is a universal financial instrument that has certain advantages over others similar to it. The main advantage of the transaction is its individual nature, which allows for very professional risk hedging. Forward agreements do not provide for the withdrawal of additional funds or commissions. As for the privileges for banks, we can note the ability to set the value of the underlying asset and dictate their own terms of agreement, since operations are over-the-counter in nature.

Cons of contracts

The main disadvantage of the contract is the lack of room for maneuver. The obligation of the parties to fulfill their part of the agreement does not allow terminating the contract before the established deadline or modifying its terms. The absence of a secondary forward market makes resale of the contract simply impossible. This leads to a fairly low liquidity of the instrument with a too high risk of failure by one of the parties to fulfill its obligations. Strict trading frameworks forced market participants to look for loopholes. For example, today it is a very common practice to conclude contracts that provide for the possibility of terminating contracts by agreement of two parties or on the initiative of one, but with subsequent payment of compensation.

What limits the number of participants in the forward market?

The number of participants in the forward market is strictly limited by a whole set of norms and standards. In order to purchase or sell a forward contract, traders must have a line of credit, a high rating and stable financial contacts with a banking institution. The disadvantage of forward transactions for participants is due to disabilities when choosing a partner bank, you have to accept the conditions that financial institutions actually dictate. Certain difficulties are also associated with finding partners, because finding a side that is ready to take the opposite position is not so easy. This leads to a lack of popularity and activity in the forward contract market.

What is the difference between a futures contract and a forward contract?

Future value contracts are forwards and futures. There is a significant difference between them. A forward is signed between a buyer and a seller, with the main purpose of the partnership being the actual delivery of the asset. Forward agreements are implemented within the over-the-counter market, which leads to low liquidity of the instrument compared to futures. For example, it is very difficult to find a buyer for hundreds of tons of metal if it is no longer relevant for a particular plant.

Futures, in comparison with forwards, act as a standardized contract, the main purpose of which is speculation. There is no talk of any real delivery here. Forwards and futures, despite their apparent similarity, are used for opposite purposes. The term “standardized” refers to a clear limitation of the quantity of goods by the conditions of the exchange. Only whole lots are allowed for trading. For example, a lot of copper is 2500 pounds, and a lot of wheat is 136 tons. Options, forwards and futures are financial instruments, but the purpose of their existence is different, which determines the specifics of their application.

Forward currency contracts

The general characteristics of a forward currency contract provide for preliminary clarification of the terms of the partnership according to the following parameters:

1. Contract currency.
2. Transaction amount.
3. Exchange rate.
4. Payment date.

The duration of forward transactions can vary from 3 days to 5 years. The most common contract terms are 1, 3, 6 and 12 months from the date of conclusion of the contract. A forward foreign exchange contract inherently belongs to the category of banking transactions. It is not standardized and can be adapted to any situation. The market for forward transactions, the duration of which does not exceed 6 months in the dominant currency pairs, is very stable. The segment of the market in which transactions are concluded for 6 months or more is characterized by instability. Any implemented long-term transaction may cause significant fluctuations in rates on the foreign exchange market.

Types of forward transactions

A forward contract can be presented in two formats:

1. A simple forward transaction, or outright agreement. This is a single conversion transaction that has a clear value date that differs from the spot date. The situation does not provide for a simultaneous reverse transaction. An agreement is concluded between the parties to provide a certain amount for a clearly established term and at a fixed rate. This transaction format is widely used to hedge against exchange rate volatility.
2. Swap transactions. This tandem is opposite to conversion-type transactions, which have different value dates. Foreign exchange transactions between banks are a kind of combination between the purchase and sale of one currency, but in completely different time periods. A certain amount in the equivalent of one currency is simultaneously sold and bought on the market for a clearly established period and vice versa.

When considering the question of what a forward contract is, it is worth clarifying the fact that these types of agreements use a specialized forward rate, which is radically different from the spot rate. The reason lies in the differences between the deposit interest rates that countries offer. A specialized formula is used to calculate the forward rate.

The parties enter into various agreements between themselves, under which mutual obligations must be fulfilled within a specified time. When a contract is concluded “in advance”, that is, its object will have to be delivered in the future, such an agreement is called “forward”.

What forward contracts can be, what are their nuances and possible risk You will learn how a “forward” transaction proceeds from this article.

What is a forward contract

The word "forward" in translation means "forward". The name characterizes the main feature of forward contracts - the terms of the transaction acceptable to both parties are fixed before it is concluded.

Forward or forward contract is a contract or agreement concluded without the participation of an exchange regarding the delivery of a specified quantity of an asset by a certain date under the conditions specified at the time the contract was concluded.

The meaning of such an agreement is that the conditions initially outlined in it cannot be changed by either party and are guaranteed to be fulfilled on the stipulated date.

FOR YOUR INFORMATION! Formally, the asset being sold is not limited to securities, but in practice, currency is most often sold using forward contracts, and the parties are credit institutions, traders, trade and production organizations. Oil is also often sold this way.

A forward contract is concluded when it is assumed that the value of an asset may change over time, that is, the product may depreciate or rise in price sharply. A forward transaction reduces the risk of adverse consequences from such dynamics.

Features of a forward agreement

Defining features of a forward contract and its differences from other types of similar agreements:

• the forward is concluded outside the exchange, in contrast to a similar agreement - futures;
• the term of the forward contract can be any that the parties agree on;
• there is no strict standard for forward transactions, unlike futures;
• reporting on forward contracts is not required;
• the forward cannot be broken or changed by either party;
• have a free form regarding the expression of the will of clients;
• the forward does not have retroactive effect;
• the parties do not incur expenses for concluding a forward contract.

The main disadvantage such agreements is due to insufficient insurance of partners. Despite the fact that the deal is declared “firm,” if the market situation changes, the profit may exceed the penalties and the desire to maintain a good reputation. In such situations, it is possible that the partner will not fulfill his obligations.

IMPORTANT! When concluding forward agreements, particularly careful due diligence of counterparties is recommended.

Main components of a forward

Forward contracts have the following basic characteristics.

1. Subject of contract- a realizable asset. This can be either a real product or a financial instrument (for example, an interest rate).
2. Asset quantity to be delivered. Should be indicated in units convenient for the client.
3. Asset delivery date, firmly fixed and not subject to change. It is advisable to determine the time of delivery of the asset.
4. Delivery (execution) price- the amount paid by the buyer of the asset to the seller (fixed in the terms of the contract and cannot be changed).
5. Forward price- the same delivery price, but not constant, but determined for a specific time point.
6. Forward price- the difference between the forward price and the delivery price. It may need to be calculated if the forward contract is resold on the secondary market. In such conditions, the forward price at the time of resale of the contract is taken as the first indicator.

NOTE! The forward price can be called the delivery price of a contract concluded at a given time.

Example showing the difference between the delivery price and the forward price

Forward contract 1 for the delivery of shares of Alpha Company to Beta Company on September 10, 2017 was concluded on June 1, 2017. Price condition – 120 rubles. per share. On this day, the delivery price coincides with the forward price. On July 1, shares are quoted at 130 rubles. The delivery price remained the same (it does not change), the forward price became 130 rubles. On this day, Alpha entered into forward contract 2 to sell another batch of shares on the same date. In contract 2, the delivery price will already be 130 rubles, since it has changed in the market. On September 10, 2017, Alpha shares were quoted at RUB 110. This will be the forward price. But the Beta company will have to pay the delivery price - under contract 1 it will be 120 rubles. per share, and under contract 2 - 130 rubles. per share.

Positions of the forward sides

Depending on whether a particular party's claims or obligations predominate, the appropriate forward contract position may be selected:

• short position seller means a larger amount of the underlying asset sold compared to purchased (liabilities exceed claims);
• long position buyer - the quantity purchased exceeds the quantity sold (requirements exceed obligations).

The party taking a short position assumes that the market price of the asset will decrease, so it is urgent to sell it before it falls critically low. This policy is called short-selling.

And the side with a long position expects prices to rise, so it prefers to buy with hope for the future (bull play).

Types of forwards

There are three types of forward agreements:

• supply- that is, the underlying asset specified in the contract must actually be delivered and transferred from the seller to the buyer;
• settlement- the asset is not actually transferred, but on the specified date the difference between its market value and that fixed in the agreement is offset and compensated;
• foreign exchange- the parties exchange currencies, the rate of which remains unchanged.

Based on the type of underlying asset, forwards can be divided into 2 groups.

1. Commodity forwards- imply a material item of sale and purchase, such as:
   • energetic resources;
   • metals;
   • agricultural products, etc.
2. Financial forwards- the underlying asset is a financial instrument:
   • currency;
   • interest rates;
   • stock;
   • other securities and stock values.

If we take into account the parties to the contracts, we can distinguish:

• forwards between banking organizations or between a bank and a client;
• forwards between trading and manufacturing enterprises.

Example of a commodity forward

The trader is studying the situation on the precious metals market and assumes that the price of platinum, which at the date of his research was about 1,600 rubles per gram, will rise. He enters into a forward contract to purchase platinum at a price of 1,700 rubles per gram for a period of 3 months. After the specified time, the quotation of platinum is 1900 rubles per gram. The trader will buy platinum at the price fixed in the contract of 1,700 rubles, immediately sell it for 1,900 rubles and will have net profit 200 rubles per gram of precious metal.

Financial Forward Example

The client wants to sell 10,000 euros to the bank, but not now, but in six months. He enters into a foreign exchange forward agreement with a banking organization. At the time of the conclusion of the contract, the euro exchange rate was 63 rubles. According to the rules of the contract, it is necessary to make a deposit in the agreed amount that suits the parties, let it be 20%. The client deposits 2,000 euros to the account of a banking organization at the indicated rate. After 6 months, due to changes in the political situation, the euro exchange rate is 70 rubles. The client deposits the remaining amount - 8,000 euros, and the bank pays him the money in rubles at the increased exchange rate.

Hedging with forwards

Hedging is a mechanism for reducing contract risks. It involves opening financial transactions that can compensate for losses if the market turns unfavorable. The purpose of hedging is to minimize possible losses due to fluctuations in market conditions.

For example, when trading currency, it is not always possible to predict whether the exchange rate will rise or fall. Let's assume that the profit under the contract will be in the event of an increase. In this case, it will consist of concluding in parallel with this a contract that will give a gain if the exchange rate decreases. Naturally, the profit in this case will be less, but the possible loss is also less.

In business practice, it is customary to hedge the following types of risks:

• currency, arising as a result of exchange rate fluctuations;
• interest rate, the reason for which lies in changes in securities quotes;
• commodity, associated with price dynamics, inflation and other economic factors.

IMPORTANT! The key principle of hedging is to reduce risks, but not to take advantage of the situation in order to obtain additional profit.

An example of forward hedging. The entrepreneur plans to purchase imported goods abroad in the next quarter. To complete this transaction, he will need currency. But it is unknown what the exchange rate will be in a few months, and the businessman decides to hedge using a forward. He enters into a forward agreement with the bank to purchase currency at the current exchange rate. Now he is insured against losses if currency quotes rise, but will not be able to make a profit if the currency price decreases.

ATTENTION! A forward contract is only one way to hedge. Futures, options, swaps and other financial instruments are also used to manage risks.

Investing using a forward contract

You can invest money without buying and selling assets themselves, but only with liabilities. A forward contract is a very convenient vehicle for such investments.

Since the terms of the forward are not standardized, they can be selected in such a way that they completely repeat the conditions for the sale of the underlying asset itself, for example, shares. When the contract is signed, the shares are worth a certain amount. The trader then sells the contract, receiving the value of the shares at the time of sale. Thus, the contract acted as a derivative instrument to reduce investment costs that are inevitable on the stock exchange.

Nuances of a domestic forward

In foreign practice, forward transactions are much more common than in the Russian Federation. Many economists do not recognize the level of such contracts as higher than in betting or gambling. Nevertheless, the forward is increasingly occupying a place in Russian economic practice.

The legislative framework for forward contracts was laid down about 20 years ago in the following regulations:

• instructions of the Bank of the Russian Federation dated May 22, 1996 No. 41 “On establishing limits on open currency positions and monitoring their compliance by authorized banks of the Russian Federation” - for making forward transactions between banks or between a bank and a client;
• Regulation of the Bank of the Russian Federation dated March 21, 1997 No. 55 “On the procedure for maintaining accounting records of purchase and sale transactions of foreign currency, precious metals and securities in credit institutions” - defines a forward transaction as an agreement under which obligations are carried out with a delay of at least 3 days after the conclusion;
  Decree of the Government of the Russian Federation dated July 10, 2001 No. 910 “On the Program of Socio-Economic Development of the Russian Federation for the Medium Term (2002-2004)” - allowed transactions with deferred execution to be recognized as bets.

Risks of forwards specific to the Russian Federation

Equating forward transactions to games and bets, experts insist on their predominantly risky nature - the impossibility of completely calculating the result and the great influence of random events on them. The meaning of this equation is the absence of judicial protection for such transactions, because betting is a voluntary matter, unlike contracts, where failure to fulfill obligations provides for certain sanctions.

Resolution of the Constitutional Court of the Russian Federation dated December 16, 2002 No. 282-O indicated the illegality of classifying forward transactions as bets and refusing judicial protection regarding them, since the risk in games and bets and in forward transactions is of a different nature.

1. The gaming risk is created by the excitement of the players themselves, and with forward the risk is of an entrepreneurial nature and is associated with the characteristics of the market, without bearing the characteristics of specific participants.
2. In contrast to the goal of the game and bet - to enjoy the process, receiving benefits if possible, the main goal of the transaction, like any business activity, is to make a profit, reducing risks if possible.

Recent legislative changes state: if at least one of the parties to a forward transaction is legal entity who has a license for banking operations or market activities, then forward transactions with him will be protected in court.

FOR YOUR INFORMATION! Abroad, forward transactions are very common and protected by law, but in our country this market segment needs further improvement and development.