Forward contracts - part 2

In this lesson

1. 0:00 Forward contracts introduction
2. 1:02 Identifying bid and offer rates
3. 1:57 Applying premium to forward rate
4. 2:59 Converting euros to pounds calculation
5. 3:47 Key takeaways and review

About this lesson

You'll work through a practical example involving a UK company receiving euros, learning how to identify bid and offer rates, apply premiums and discounts correctly, and convert foreign currency amounts using forward rates. This builds on part 1 and equips you with the calculation skills needed to handle hedging questions confidently in your exam. Forward contracts lock in a fixed exchange rate, removing both upside and downside risk—but they're binding commitments. The video walks you through the methodology step by step: first, determine whether you're using bid or offer rates by looking at which currency the exchange rate is quoted in; second, adjust the spot rate by the premium or discount (remember, you deduct a premium and add a discount); third, convert your foreign currency amount using the forward rate. The worked example shows you how to avoid common pitfalls, like confusing cents with euro cents, and how to divide correctly when converting euros to pounds. With practice, these calculations become routine and you'll handle even the trickiest exam scenarios with confidence.

Duration: 5m