Forex forward transactions are similar to Forex spot transactions in almost all respects other than the timing of the transaction. When dealing in a market of currency exchange in which currency values are constantly fluctuating in value, there is the option to pursue an immediate transaction known as a Forex spot transaction or a much later date known as Forex forward transactions.
What is Forex forward transaction?
The Forex forward transaction functions in a way that the two parties involved agree on the currency pair to be exchanged at a later date. Forex investors and traders refer to the rate of currency transaction as the forward rate. The ability of Forex investors and traders to agree on a forward rate for a transaction to occur as much as into the future as two years can be either an advantageous or disadvantageous characteristic of this transaction.
What are the advantages of the forward transactions?
The advantage of forward transactions trading is that it allows parties involved to avoid potential losses that may be suffered from adverse currency exchange rates calculated to occur in the future. Forward transactions enable parties to avoid losses in a market of volatility, especially when dealing with very high quantities of currency. Exchange rates of currencies can fluctuate from day to day or hour to hour, and it is important to avoid these currency pitfalls if possible. Some major market fluctuations effecting currency exchange rates can be caused by political or social upheavals and increase in instability in the country’s economic market.
What are the disadvantages of the forward transactions?
While there are indeed many advantages to pursuing Forex forward transactions, it is crucial to remember possible disadvantages with such trading practices. Once parties agree to a contract, then it is legally binding and must be acted upon as agreed. Many times there are contract parties which fail to predict certain emergency circumstances which may prevent them from being able to comply with a forward transaction on the date of the forward rate. More importantly, there is the disadvantage in which adverse market changes can be avoided but then parties are prevented from benefiting from positive market changes. Many times the market may change for the best, and in such scenarios it is the contracting parties to a forward transaction who may suffer some losses.
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