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  • WTO launches new edition of Handbook on the TRIPS Agreement November 27, 2020
    The WTO launched today (27 November) the second edition of “A Handbook on the WTO TRIPS Agreement”, which describes the historical and legal background to the Agreement on Trade-related Aspects of Intellectual Property Rights (TRIPS), its role in the organization and its institutional framework. The publication coincides with the 25th anniversary of the entry into […]
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  • WTO to host first Trade for Peace Week November 25, 2020
    The WTO will host the first edition of the Trade for Peace Week from 30 November to 4 December 2020. Ten virtual panel sessions will explore the nexus between trade and peace, with the focus on fragile and conflict-affected countries in accession which want to use trade and economic integration to promote sustainable and inclusive […]
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  • DDG Agah at ITC Joint Advisory Group: Open trade and economic inclusion key to post-COVID recovery November 25, 2020
    In remarks on 25 November to the 54th session of the Joint Advisory Group that oversees the work of the International Trade Centre (ITC), WTO Deputy Director-General Yonov Frederick Agah argued that open international trade, together with efforts to ensure the benefits from economic activity are widely shared, would be necessary to repair the social […]
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  • DDG Wolff: “WTO reform is both necessary and feasible” November 24, 2020
    Speaking at the “1+6” roundtable meeting presided by Chinese Premier Li Keqiang on 24 November, Deputy Director-General Alan Wolff urged WTO members to begin serious engagement on improving the WTO, arguing there was enough common ground to reach major new agreements. He also called on China to participate actively and contribute positively to planning far-reaching […]
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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