What are forex/currency forwards?
Forex/currency forwards are derivatives that give you the obligation to buy or sell FX at a specific price, on a specific date in the future. FX forwards are traded over the counter, and they are not standardised for everyone.
Remember, with forex trading, you’re speculating on currencies without taking ownership of the physical assets. You can choose between FX forwards, spot currency trading or FX options. Many individuals prefer trading forex forwards because it enables them to take positions over the longer term without paying overnight funding costs.
Forex/currency forwards essentials
Keep these four things in mind when thinking about trading currency forward contracts:
You’re always trading a currency pair with FX forwards
When you trade FX forwards, you are agreeing to trade a currency pair at a set price on a set date in the future. This means you intend to buy one currency (base currency) and sell another (quote currency)at a predetermined price because you believe one of the currencies will strengthen against the other by a specific date.
You can buy or sell FX forwards
Buying a forex forward
If you want to buy forex forwards, you would be betting that the base currency will rise against the quote over a certain period of time. Let’s say EUR/USD is trading at 1.1900, with a buy price of 1.1910 and a sell price of 1.1890. You believe EUR will rise against USD over the next six months, so you agree to buy EUR/USD at a price of 1.1910 at a specified date in the future.
After the six months have passed, EUR/USD is trading at 1.2210, with a buy price of 1.2220 and a sell price of 1.2200. You execute your contract at the agreed buy price of 1.1910, which is 0.0310 less than the current buy price.
Selling a forex forward
Similarly, you would sell an FX forward contract if you think the quote will rise against the base currency over a certain time period. For example, if EUR/USD is trading at 1.1900, with a buy price of 1.1910 and a sell price of 1.1890. You believe USD will rise against EUR over the next three months, so you agree to sell EUR/USD at a price of 1.1890 at a specified date in the future.
After the three months have passed, EUR/USD is trading at 1.2190, with a buy price of 1.2200 and a sell price of 1.2180. You execute your contract at the agreed sell price of 1.2180, which is 0.0290 more than the current sell price. You would still have to pay the agreed amount and would suffer a loss.
You can speculate on forex markets over a longer timeframe, with no overnight costs
Trading forex forwards means you can speculate over a longer timeframe, as when you buy or sell a forward contract, it only has to be honoured at a specified date in the future. You won’t have to pay any overnight funding costs to keep your positions open, but the spreads when opening positions will generally be wider than those offered on spot forex markets.
You can hedge other positions with currency forwards
Hedging with forwards involves opening a contract that will offset risk to an existing trade, such as an open spot forex position. For example, selling an FX forward contract is a popular method of protecting yourself against the depreciation of a currency.
How to trade forex/currency forwards
|Forex forwards||Forex options||Spot forex|
|How it's priced||Based on spot price||Based on spot price||‘On the spot’, with continuous, real-time pricing|
9pm Sunday to 10.15pm Friday (UK time)
9pm Sunday to 10.15pm Friday (UK time) Break from 8-9pm for daily options
9pm Sunday to 10.15pm Friday (UK time)
|How many pairs can I trade?||80+||80+||80+|
|Costs and charges||Larger spread but no overnight funding charges||Higher premium but no overnight funding charges||Narrower spread but with overnight funding charges|
|Risk to capital||You could lose more than your deposit (margin)||Limited to premium if you buy put or call, could lose more than premium if you sell||You could lose more than your deposit (margin)|
Pick the currency pair you want to trade
You can choose from over 80 currency pairs, including:
- Major currency pairs, eg GBP/USD, EUR/USD, and USD/JPY
- Minor pairs, eg USD/ZAR, SGB/JPY, CAD/CHF
- Emerging currency pairs, eg USD/CNH, EUR/RUB and AUD/CNH
- Exotic pairs, eg EUR/CZK, TRY/JPY, USD/MXN
Open a trading account
You can trade FX forwards with a spread betting or CFD account. Both are derivative products, which means you only need a margin (deposit) to open your position.
Choose your timeframe
Decide when you want to honour your forward contract – ie when you want the expiry date of the contract to be. You can close a forward contract trade before the expiry date of the contract arrives.
Choose whether to buy or sell
You can go long (buy) or short (sell) a forex forward contract. You’d go long if you believed that the underlying currency pair’s price will rise, and you’d go short if you believed it will fall.
Open and monitor your position
Once you’ve decided whether to buy or sell your chosen currency pair, you can monitor your position on our forex trading platform using the free tools and indicators available to you. Remember to stay abreast of any news and events that may affect the price of the FX pair you’re trading.
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