Forward Market

Forward market is an over the counter market.lets understand what is OTC market?Over the counter market is an important alternative to exchange and measured in term of total volume and trading.It is a telephone and computer linked network of dealers who do not physically meet.Trades are done between a financial institution and one of its corporate clients.Trades in the over-the-counter market are typically much larger than trade in the exchange traded market .

Now understand what is forward contracts?
A forward contract is particularly simple derivative.It is an agreement to buy or sell an asset at a certain future time for certain price.

“Forward contract is traded in the over-the-counter market.Usually between two financial institution and one of its clients.” forward contract on foreign exchange are very popular most large bank have “forward desk” within their foreign exchange trading room.

Forward in the debt market.
The forward contracts that are found in the debt market are.
1) Forward Interest rate contracts:-Forward interest rate for a future period of time implied by the rates prevailing in the market.Forward interest rates are the rats of interest implied by current zero rates for periods of time in the future.

2)Repurchase agreements(Repo rate):-Repurchase agreement a contract where an investment dealer who owns securities agrees to sell them to another company now and buy them back letter at slightly higher price.
The difference between the price at which the securities are sold and the price at which they are repurchase is the interest it earns.The interest rate is referred to as the repo rate.

Type of repurchase agreement .
1) Open repurchase agreement :-Open repurchase agreement is where there no agreed termination date.Both parties have the option to terminate the agreement without notice .Rate of these agreement is usually a floating rate.
2)Fixed term repurchase agreement-Where the rate and the term are agreed at the outset of the agreement.The term of repos usually ranging from a day to a few months.

3)Forward rate agreement:-A forward rate agreement is an over-the-counter agreement that a certain interest rate will apply to a certain principal during a specified future period of time. FRA is agreement between two parties based on a notional amount for an contract period.This is a contract where interest rate is fixed for future.FRA hedge the interest rate risk.its consist of one to six month.

 

 

 

 

 

 

Leave a Reply