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Currency forward outright transaction

Currency forward outright transaction (FX forward outright) is a transaction between you and the bank to purchase one currency against selling another currency at a fixed price for delivery on an agreed date in the future. If you have assumed an obligation to make future payments or receive income in a foreign currency, you can conclude this transaction now and you will know your expenditure or income in that currency in advance, so you can protect yourself against negative future exchange rate fluctuations and plan your company's cash flow accurately.

Basic terms of transaction

  • There is no minimum transaction amount
  • Transaction may be executed in instalments, earlier or later than agreed
  • No additional fees are applied to such transactions

Example

The company has to settle accounts with its suppliers – to pay USD 100,000 to them – after three months.

The company earns income in euros. Seeking to ensure that no foreign-exchange related losses will be incurred by it in the future,  the company concludes a forward US dollar purchase transaction,  i.e. it agrees with the bank that it will buy US dollars against euros at a fixed rate of 1.30 US dollars for euros.

Upon expiration of this period, the US dollar exchange rate stands at 1.28 but the company buys the currency at the rate of  1.30 that is more favourable than the current market rate.

In case upon expiration, the US dollar exchange rate stands at 1.32 in the market, the company would  still buy the currency under the conditions of the foreign exchange forward transaction, i.e. at the rate of 1.30.
 

Risks

The major risk is related to currency value changes in the market because both parties must perform their obligations  assumed under the transaction.

For instance, in case of a foreign exchange forward transaction, once the parties have agreed on a fixed rate of exchange on a specific date, the currency buyer would incur a loss in case the market price of the currency decreases, whereas the currency seller would incur a loss if the market price of the currency increases.

These transactions are concluded over-the-counter; therefore, under certain circumstances in the market, the market value of fixed-term forward transactions or forward transactions with a given currency may be subject to higher volatility. For this reason, where the concluded forward transaction is sold on the market, or where an offsetting forward transaction is used for closure, the market value of the transaction may be unfavourable to the party to the transaction.
 

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Markets in Financial Instruments Directive

The Markets in Financial Instruments Directive (MIFID) regulates the rendering of financial investment services has been effective in the European Union and the European Economic Community (EEC) since 2007. The requirements of MiFID are aimed to provide additional protection to investors and promote the transparency of financial markets in terms of transactions in financial instruments.

After 3rd January 2018, new rules of the Markets in Financial Instruments Directive 2014/65/EU (MiFID II) came into force and affect each investor who engages in transactions in financial instruments.

 

Please note that the data, examples and information on derivative financial instruments provided herein is for informational purposes only. This information has been prepared without consideration or regard of your knowledge or experience related to specific financial instruments and without having any information about your investment objectives or financial capacity to assume risks related to the conclusion of the transaction that meets your investment objectives; therefore, it cannot be construed as a personal investment recommendation, advice on trading in derivative financial instruments or investment research, order or invitation to buy or sell specific financial instruments and may not constitute any basis or part of any subsequent transaction.