FORWARD CONTRACT
Chapter notes, video classes, MCQ practice tests and quick-revision one-liners for Risk Management (Elective) — CAIIB.
One-liners from this chapter
Free sample — 8 of 66 rapid-fire Q&A cards.
What is a forward contract in the context of foreign exchange?
A forward contract is a customized agreement between two parties to buy or sell a specified amount of foreign currency at a predetermined exchange rate on a future date. It is used to hedge against exchange rate risk.
What is the maximum tenor for a forward contract in India as per RBI guidelines?
Generally up to one year, extendable in some cases.
How does a forward contract differ from a futures contract?
A forward contract is an OTC (over-the-counter) instrument that is privately negotiated, non-standardized, and not traded on an exchange, whereas a futures contract is standardized and traded on an organized exchange.
What is the difference between a 'fixed date forward' and an 'option forward' contract?
Fixed date has a single maturity date; option forward allows delivery within a range.
What is the 'forward rate' in a forward contract?
The forward rate is the exchange rate agreed upon today for a transaction that will occur at a specified future date. It reflects the spot rate adjusted for the interest rate differential between the two currencies.
What is meant by 'early delivery' of a forward contract?
Delivering currency before the contracted maturity date.
What is the formula used to calculate the forward rate using Interest Rate Parity?
Forward Rate = Spot Rate × (1 + Interest Rate of Quote Currency) / (1 + Interest Rate of Base Currency). This ensures no arbitrage opportunity exists between the two currencies.
What is a 'rollover' of a forward contract?
Extending a forward contract beyond its original maturity date.
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