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FX Forward

FX Forward


FX-Forward transaction is an equivalent of FX-Spot conversion, but delayed in time. It means that the FWD conversion rate for a future value date is set now and will be settled at maturity of the deal (in 1 Month, 2 Months, 3 Months etc.). This is quite simple transaction, because there is no 2nd Leg, which revaluation would be depending on future development of market rates. 

Nevertheless, as opposed to the FX-Spot deals, FX FWD is consuming Pre-settlement as well as Settlement limit, as another Derivatives do. This is mainly reflecting the risk that another Counteparty (Deutsche) in the deal would default on delivering pre-agreed countervalue and Citi would be forced to close the open position on the market, but based on current FX-spot rate.

Example from practice:

Czech-based IKEA subsidiary will need to pay the purchase price for lands that it is going to buy to construct there a new Shopping centre. For this purpose, it has agreed to receive an inter-company loan from parent coy IKEA AB. This loan was agreed to be denominated in EUR, and it will be distributed in 2 Months. Nevertheless, given the current monetary policy adopted by Czech National Bank, it is widely expected on the market that Czech currency will continue in strengthening in near future (as a result of gradual interest rates increase on CZK). Given this, IKEA CR would like to protect itself against the risk that incoming EUR funds will not be sufficient after FX-Spot conversion into CZK to pay-out the full purchase price for lands, which was agreed with current owner in CZK. Therefore, it has concluded with its Bank FX-FWD sale of EUR funds into CZK, and it has secured for IKEA that when selling EUR 0,5Mio to Deutsche, it will receive precisely CZK 12,83Mio, but nothing less. Given this transaction, the future conversion helped to protect (hedge) against unexpected development on EUR/CZK currency pair even 2 Months ahead.

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