Our Articles

Enjoy,comment and share

Recent Posts

Categories

RSS International Monetary Fund

RSS World Trade Organization — Latest news

  • Heads of WTO and development banks voice support for trade finance amid COVID-19 crisis July 1, 2020
    The heads of the WTO and six multilateral development banks on 1 July issued a joint statement promising to address shortages in trade finance, so that financial market stresses arising from the COVID-19 crisis do not prevent otherwise-viable trade transactions, including for essential goods such as food, drugs and medical equipment. They committed to do […]
    WTO
  • Panels established to review Indian tech tariffs, Colombian duties on fries June 29, 2020
    WTO members agreed at a meeting of the Dispute Settlement Body (DSB) on 29 June to a request from the European Union for a dispute panel to examine India’s tariffs on certain high-tech goods. The DSB also agreed to an EU request for a panel to review Colombia’s anti-dumping duties on frozen fries from Belgium, […]
    WTO
  • WTO report on G20 shows moves to facilitate imports even as trade restrictions remain widespread June 29, 2020
    While import-restrictive measures introduced by Group of 20 (G20) economies continue to cover a growing share of trade, the WTO’s latest biannual monitoring report on trade measures — the first to cover a time period coinciding with the coronavirus pandemic — points to significant moves to facilitate imports, including products related to COVID-19. During the […]
    WTO
  • DDG Wolff: WTO acceding governments reconfirm value of multilateral trading system June 29, 2020
    At a time when the WTO is under heightened scrutiny and reform of the WTO is a subject of concern for all, the efforts undertaken by acceding governments to join the organization are a force for change, Deputy Director-General Alan Wolff said on 29 June. Speaking at the virtual opening session of the WTO’s Accessions […]
    WTO

Forward contracts



 

 

Forward contracts  enable to avoid adverse impacts of currency fluctuations.Indeed Importers and exporters who are engaged in transactions denominated in foreign currency can benefit from using this hedging tool.

A forward contract is a firm engagement to deliver a certain amount of foreign currency at a given date and at a fixed exchange rate.

Let’s take the example of Spanish Importer who concluded a 10 565 240 USD (10 M EUR) deal with a US Exporter with a 90-day payment term. Note that at the time of the agreement, the exchange rate was 1 EUR = 1.0565 USD. In order to avoid the risk engendered by a potential rise of the USD, the importer will ask his Bank for a 3month forward exchange rate.

The Banker will proceed as follows:

He will borrow 10 M EUR with a 1% interest rate during 3 months.

He will then buy USD and invest them for 1.5% yield during three months.

Based on the preceding the banker will offer a 3 month rate of: 1 EUR=1.0578 USD

1.0565 * (1+90/360* 0.015) / (1+90/360*0.01) = 1.0578

In this case the fact that the 3 months forward exchange rate is higher than the spot rate is explained by the better yield in USA.

Therefore, by entering into a foreign contract, the Bank will have the obligation to deliver 10 565 240 USD against 9 987 937 EUR (10565240/1.0578) at maturity.

 Shortcomings:

Unlike option contracts, forward contracts does not allow to benefit from favourable fluctuations since the Banker and the Exporter have the obligation to deliver a specific amount of foreign currency at a specific exchange rate and at a specific date.

As a result forward contracts are usually cheaper than Options, which means that, depending on circumstances, a trade off between flexibility and price will have to be made.

Please click on the links below for more hedging techniques