Forward exchange contracts
In this lesson, you'll learn how forward exchange contracts work and how to calculate forward exchange rates—essential knowledge for FM and AFM papers where currency risk management is tested.
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In this lesson
- 0:00 Forward exchange contracts explained
- 0:20 How banks quote forward rates
- 1:05 Worked example: calculating forward rate spread
- 1:57 Converting cents to dollars correctly
About this lesson
A forward exchange contract locks in an exchange rate with a bank for a future transaction, protecting you from currency fluctuations, though the bank charges an embedded fee and the contract is typically non-cancellable. You'll discover how banks quote forward rates using either a spread or an adjustment (discount or premium) to the spot rate, and work through a practical example calculating the six-month forward rate. Pay close attention to decimal places when adjustments are quoted in cents rather than dollars—a common source of errors in exam questions.
Duration: 3m
Transcript
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